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The ENRON-ization of Democracy - Multi-Part Series - Part I
The Enron-ization of Democracy - Part I of a four part report investigating the history and politics behind the push for Northern California's Plan Bay Area regional planning initiative, and how the abuse of joint powers authorities (JPAs) is robbing communities of representative government.
In August of 2001, Sharon Watkins, a vice president at ENRON Corporation, an “innovative energy trading company,” wrote a memo commenting on some unusual accounting practices. By October, as the news hit the press, ENRON’s stock began to dive from its recent highs of $90 per share to below $1 a share, by November 1st.
Its precipitous fall had little to do with the events of 9/11.
The financial world was in shock. How could one of the most valuable companies in the world, with $100 billion in assets, suddenly become worthless: a company whose finances were overseen by one of the country’s most prestigious accounting firms, Arthur Anderson? The answer is complex but at the risk of over-simplifying, their demise was due to something that might be called “off the books” transactions that showed up as “assets” in their balance sheet but were actually liabilities. More accurately, most of those “assets” turned out to be worthless.
What ENRON had been doing is taking all its questionable business deals, failing investments and operations and putting them into so-called “arm’s length” subsidiary entities that were out of the public’s (and apparently their accountant’s) view. Then they were free to magically value them as wildly profitable. They only kept trades and transactions that were actually profitable in the main company, and those turned out to be far and few between (see The Smartest Guys in The Room, by Bethany McLean and Peter Elkind).
At the time, ENRON was the biggest bankruptcy in American history. But as the old saying goes, “You ain’t seen nothin' yet.”
By the fall of 2008, the world’s 14 biggest bankers showed us how it’s really done and almost brought down the global economy in the process. ENRON’s little accounting games were nothing compared to the tens (hundreds?) of trillions of dollars of worthless “assets” that the big banks held on their books: assets with fancy names like collateralized debt obligations (CDOs) and mortgage backed securities (MBS debt), and other more exotic derivatives and financial creations.
These billionaire banksters had succeeded in creating an off the books shadow banking system far larger than the real banking system itself. It’s a crime that you and your children will be paying for, either through inflation, taxes or debt, for the rest of your lives (See The Big Short, by Michael Lewis).
You would think we would wise up. But not to be outdone, your government is now hard at work perfecting this way of doing business in ways ENRON never dreamed of.
The Rise of the JPA
In the early 1920’s a variety of government agencies began to realize that collaboration with other cities or other government or quasi-government agencies allowed them to more efficiently and effectively provide services, purchase insurance and implement programs, or in some cases stay solvent. Since that time, a series of legislative acts and court rulings evolved into what has come to be known as a “Joint Powers Authority” (JPA).
As described in the 2007 report, Governments Working Together, by Trish Cypher and Colin Grinnell:
“Joint powers are exercised when the public officials of two or more agencies agree to create another legal entity or establish a joint approach to work on a common problem, fund a project, or act as a representative body for a specific activity.
“Agencies that can exercise joint powers include federal agencies, state departments, counties, cities, special districts, school districts, redevelopment agencies, and even other joint powers organizations. A California agency can even share joint powers with an agency in another state.
“Examples of areas where JPAs are used commonly include: groundwater management, road construction, habitat conservation, airport expansion, redevelopment projects, stadium construction, mental health facilities construction, educational programs, employee benefits services, insurance coverage, and regional transportation projects.
“For example, the City of San José signed a joint powers agreement with Santa Clara County to jointly administer redevelopment funds. In another example, the City of Palo Alto has a joint powers agreement to provide cable television service to area residents.”
Over the years, JPAs evolved from simple partnerships into highly complex entities that increasingly had more and more governing powers, previously only reserved for elected governing bodies, including the power to assess fees and sell bonds. In its latest iteration, a JPA’s increasing powers were codified in the Joint Exercise of Powers Act, SB 1350, Senate Local Government Committee, in 2000.
In the beginning, JPAs worked well. But like many simple ideas with noble goals, JPAs have morphed into something far beyond the intentions of their creators. Like the big banks, creative minds have used this vehicle to assemble shadow government agencies that operate pretty much off our radar and without public scrutiny. And more and more, it appears that’s become the real goal of creating them.
What started out as a way to provide more efficient and less expensive public services, has been seized upon by politicians as a method of eliminating public input and democratic process.
Again, noted by Cypher and Grinnell:
“JPAs are different from other forms of government because they are the only type of government formed by mutual agreement. Unlike other governments, JPAs are not formed by signatures on petitions, and they’re not approved by a vote of the people.”
A key point to note is that JPAs can exercise all the powers that are common to their member agencies. The only power they lack is the power to pass real estate property taxes, though they’ve learned to get around that by calling them fees. But think about this for a moment: all the powers of whatever level of government they are formed out of. And all of those powers without any of the historic checks and balances that are the foundation of our democratic system.
Yes, in theory, JPAs are created and managed by agreement between local or regional governments or agencies (water, power, sewer, police, housing, or city and county governments) under the supervision of our local elected representatives or at the least the staff members or appointees of those elected officials. However, the reality is that almost all JPAs are run by politically appointed executives who have no prior relationship with any of the JPAs member organizations. They go on to hire their own staff and consultants to create the team that will manage and make decisions for this new “quasi-governmental” agency on a day to day basis.
In practice, a JPA’s actions go largely unsupervised by anyone after their formation is approved. And the locally elected officials who approved it, who are often unpaid volunteers, can’t possibly analyze their complexities and potential unintended consequences of what they’ve created. So it’s pretty much all done on good faith and a cursory review of the JPA’s annual report.
At the risk of being cynical, in the sage words of Warren Buffet: “Only invest in things that a moron could run, because sooner or later, one will.”
JPAs - “Off the Books” Government
Entities like the Marin Energy Authority (MEA), the Sonoma-Marin Area Rail Transit (SMART), and most notably the Association of Bay Area Governments (ABAG), are all JPAs. None of the executives who make policy decisions or direct staff reports are elected.
Today, JPAs can take on debt (sell bonds, borrow money, etc.) without any vote by ratepayers or taxpayers or elected representatives, even though many provide critical public services or infrastructure.
In theory, JPAs are separate legal entities and their financial liabilities are not the public’s responsibility. But is that really true, in practice? If MEA or SMART or ABAG gets into financial trouble because of the debt they’ve issued or a construction project they’ve undertaken has cost overruns, or they default on debt and their project, that’s providing critical services to thousands of residents, is only half built, will we really say it’s not our problem to bail them out?
Let’s not forget that, “technically” under the law, we had no legal liability for all the defaults and losses of the banks in 2008. After all they weren’t even quasi-governmental entities. They were private for profit companies. Yet we were forced to bail them out with taxpayer money because they were deemed “too big to fail.”
But there is Oversight!
Legislators and JPA executives will assure you that these kinds of things won’t happen because of built in safeguards.
For example, all JPAs are required to submit to an annual audit by a certified, third party CPA. But so was ENRON and every bank that issued worthless CDOs (it’s darkly comical to note that ENRON’s auditor, Arthur Anderson, one of the world’s most prestigious firms, also went out of business because of ENRON’s defaults).
And, we’re told that although JPAs can issue debt (bonds) without a public vote (or even public knowledge), the law requires that each local city or county member organization needs to pass a local ordinance confirming the proposed program or spending purpose, which means that theoretically the “public” has been informed.
Really?
Is the public really “informed” because a half inch high ad appeared one day in a largely unread local newspaper, “notifying” the public that an obscure city agency is holding a public hearing at 2 p.m. in the afternoon on a weekday, to approve a line item on its consent calendar about a “conforming ordinance?” Really? That’s our assurance against political influence, fraud and incompetence or worse by the JPA’s management?
Good luck with that.
There’s More
Currently, the role of JPAs in our lives is even murkier than either ENRON or the perpetrators of the crash of 2008. JPAs have powers that banks only wish they had.
JPAs can lobby and spend without restriction to influence legislation, even if that legislation is contrary to the wishes of the majority of voters it serves. They can create initiatives and programs that often carry the full weight of government powers, even though the public may be completely unaware or opposed to the implementation of those programs, locally (e.g. Plan Bay Area, Transit Priority Projects Areas, etc.). They can charge fees, even though those “fees” are basically just taxes in disguise, passed without any public vote much less a 2/3 majority. They can solicit grants and funding from any source (government agencies, nonprofit or for profit companies, or private “family” foundations) regardless of any potential or obvious conflicts of interest that those funds may represent. They can have business relationships and cut deals with private financial, underwriting, or consulting companies or individuals, free from public scrutiny about anti-competitive practices or back room dealings (MEA’s dealings with Shell Oil?). And they can sell all kinds of services to anyone to increase their revenues, regardless of the public benefit or social purpose of those services.
So in theory JPAs work for the elected governments that created them. But in practice they quickly become off-the-radar fiefdoms that are by and large unaccountable and unsupervised by anyone… until they roam too far off the reservation, by which time it’s always too late.
JPA Executives Drive Public Policy Decisions
As I’ve said, JPAs are predominantly run by unelected, politically appointed executives and their staff, who rarely have any allegiance or apparently even a hint of fiduciary responsibility to their clients: the residents and taxpayers receiving the services they provide. JPA executive committees and their cadre of highly paid consultants pretty much get to make up their own rules, which are typically rubber stamped by their city and county members (as in the case of ABAG). JPA executives generally get to set their own salaries and benefits, and in the case of MEA and SMART, they are clearly making up their own style of creative accounting.
For example, the small staff at MEA is arguably one of the highest paid of any JPA in the state (or any comparable private company I know of), even though they are also arguably some of the least experienced and unqualified for their positions. In the meantime MEA has broken every promise on rates it ever made during its public dog and pony show (i.e. “Our rates will always be lower than PG&E’s;” “Our greenhouse gas emissions will always be lower than PG&E’s.”). MEA sold everyone on buzzwords like “deep green” but in fact most of their “green energy” (3.5 billion metric tons worth of GHGs) appears to be created by buying “renewable energy certificates” – an off the books accounting method that would make ENRON energy traders “green” with envy. Of course, SMART’s bookkeeping and financial promises went out the window even before the ballot count on the sales tax was complete.
But of late, one JPA in particular has had the spotlight turned on it in a big way: ABAG.
The Plan Bay Area Trojan Horse
With Plan Bay Area now adopted we are hearing a chorus of supporters assuring us that although it may not be perfect, it’s a good start. I beg to differ. However, it’s not really the Plan that is so problematic. It’s more about the laws and agencies that are driving the Plan and the potential unintended consequences and very real consequences of that, and how it will impact our future.
In some ways Plan Bay Area was a bejeweled Trojan Horse, promising only good things on the outside but filled with problems on the inside. But in order to fully appreciate this, some backstory is required.
ABAG - The Road to Hell Is Paved With Good Intentions
ABAG was formed in 1961. It began, as all these things do, with the best intentions: to share knowledge and resources among its city and county members, to plan and collaborate to achieve common goals, and most ironically, to lobby as a group in Sacramento for issues and legislation most beneficial to its Bay Area members.
ABAG produced its first “Regional Plan” in 1970. What is now called regional planning was then called “Inter-Regional Planning” that acknowledged that places like Alameda, San Francisco, Santa Clara and Contra Costa were in fact different “regions” working together in a loose affiliation. As we know, they no longer acknowledge that fact even though the geography, transportation options and planning goals for Oakland and Marin have almost nothing in common.
Housing, however, was always an agenda item for ABAG. In their 2002 Annual Report, they stated:
“Housing production, in particular affordable housing, continued to be a high priority in 2001-02 even though ABAG completed successfully its state-mandated Regional Housing Needs Determination (then called RHND) process two years ago. There was new interest at the state level to pass legislation amending the State’s Housing Element law to put greater pressure on cities to provide, as well as plan for, needed housing.”
Well, they’ve certainly succeeded at the “putting greater pressure on cities” part of it.
ABAG Today
Since the passage of Senate Bill 375, authored by State Senator Steinberg in 2008, all Metropolitan Planning Organizations (MPO’S) are required to create a Sustainable Communities Strategy – another term for a “Plan.” In our case that plan is called Plan Bay Area.
Unique in all of California, both ABAG and our Metropolitan Transportation Commission (MTC) are jointly charged with being our MPO so they created Plan Bay Area together. On an ongoing basis MTC handles the federal transportation funding that they allocate around the nine county Bay Area. ABAG deals more with the growth projections and housing issues and divvying up Regional Housing Needs Assessment (RHNA) quotas that are handed down to them by the state Department of Housing and Community Development (HCD).
But the reality of all this is more muddled.
In practice, ABAG and MTC’s authority intermingles in inseparable ways. And the definition of what is or isn’t transportation funding has become intricately intertwined with promoting certain kinds of housing development and impacting other aspects of local city planning.
Although we’ve been constantly reminded by pro Plan Bay Area advocates and our ‘go along to get along’ County Supervisors that our RHNA housing mandates were then and remain “unfunded mandates” (so theoretically the state cannot force cities to build), new laws since 2008 have provided a wide range of California Environmental Quality Act (CEQA) streamlining techniques, and allowances for presumptive zoning and entitlement arguments that can force the hands of small cities to make land available for large nonprofit and for profit developers.
SB375 in particular has been the game changer in this regard.
Senate Bill 375
A city’s General Plan is its most important planning document and tool to impact growth and property rights. So any new state or federal law that would potentially affect our General Plans would be loosely defined as impacting our “local control.”
Since the discussions about Plan Bay Area began, we’ve been endlessly reassured by City Council members, County Supervisors, ABAG executives and housing advocacy groups that SB375 guarantees that our General Plans do not have to change or conform to the provisions of SB375. In fact, the law states, in SEC. 4. Section 65080 paragraphs (a)(1)(A)2(J):
“Nothing in a Sustainable Communities Strategy shall be interpreted as superseding the exercise of the land use authority of cities and counties within the region.
“Nothing in this section shall require a city's or county's land use policies and regulations, including its general plan, to be consistent with the regional transportation plan or an alternative planning strategy.”
So I guess that means everything is fine, right? Not exactly.
SB375 specifically overrides local laws and inserts its provisions into the local planning process in many ways. For example, in the Legislative Counsel’s Digest of SB375 it states that:
“This bill would exempt from CEQA a transit priority project, as defined, that meets certain requirements and that is declared by the legislative body of a local jurisdiction to be a sustainable communities project.”
“The bill, with respect to other residential or mixed-use residential projects meeting certain requirements, would exempt the environmental documents for those projects from being required to include certain information regarding growth inducing impacts (i.e. schools, city services, infrastructure costs, etc.) or impacts from certain vehicle trips.”
“The bill would also authorize the legislative body of a local jurisdiction to adopt traffic mitigation measures for transit priority projects. The bill would exempt a transit priority project seeking a land use approval from compliance with additional measures for traffic impacts, if the local jurisdiction has adopted those traffic mitigation measures."
And it goes on to state:
“Any ordinance, policy, voter-approved measure, or standard of a city or county that directly or indirectly limits the number of residential building permits issued by a city or county shall not be a justification for a determination or a reduction in the share of a city or county of the regional housing need. (SEC. 10. Section 65584.04 (f)).”
Call me crazy but doesn’t all of this directly undermine our local zoning and planning control?
In a recent Marin IJ Op-Ed piece, Supervisor Steve Kinsey noted, as an explanation for why he voted for Plan Bay Area, that ABAG and MTC added wording to the Plan, in the eleventh hour that made everything okay.
The wording states:
“Adoption of Plan Bay Area does not mandate any changes to local zoning, general plans, or project review. The region's cities, towns and counties will maintain control of all decisions to adopt plans and permit or deny development projects."
Unfortunately, that wording has no legal standing. Inserting words into the Plan has no effect, whatsoever, on Housing Element statutes or SB375 or any other state legislation. You would think that Mr. Kinsey, who’s in the business of passing legislation at the Board of Supervisors, would understand that. Apparently, not.
If all this sounds wildly contradictory to you, that’s because it is. Commentary by attorneys during the drafting process of SB375 commented that these ambiguities alone might make SB375 unenforceable. But as of now, it’s the law, contradictory or not... at least until some city legally challenges it in the courts.
The subtle and not so subtle consequences of this contradiction appear to have been lost on our local, elected representatives. But the struggle for local control is not over by a long shot.
SB375 and New Legal Precedents
Senate Bill 375 does two very important and precedent setting things.
1. SB375 created a legal nexus between its groundbreaking regulatory requirements and the Housing Element laws with the language noted above and provisions about CEQA streamlining/exemption and “qualifying projects” having presumptive zoning rights.
2. SB375 legally defined high density, transit oriented housing development (TOD) as an “environmentally beneficial” undertaking.
It would be a mistake to under-emphasize the significance of these two things. They have fundamentally altered long standing legal principles about property rights and opened a door to many creative interpretations. They have also opened the door for quasi-government agencies, JPAs, to tap taxpayer funding pools and bond proceeds for a variety of uses that are far from the original intentions of the taxpayers who voted for them.
The SB375 / Local Housing Element Nexus
SB375 and California Housing Element Law require that cities craft their Housing Elements in compliance with all state legislation in order to receive certification from the Department of Housing and Community Development in Sacramento. Without the state’s certification a city is vulnerable to private party lawsuits for violation of state law.
However, a city’s Housing Element (its growth plan to meet the state’s RHNA quota) is a part of a city’s General Plan. Other state law requires that a city’s Housing Element and General Plan be in “conformance,” legally with regard to its policies, wording, and terminology. So in practice the Housing Element drives the General Plan, not vice verse. So the crafting of a certifiable Housing Element is the local housing policy leader with regard to zoning and planning. Each city’s General Plan has no choice but to adapt where it must.
The second aspect of this nexus is the so-called “Builder’s Remedy.” Under SB375, any developer (nonprofit or for profit) who proposes to build a "qualifying" project (at least 49 percent of the units are “affordable units”) can assume the zoning he needs, even if the land is not presently zoned, and sue the city if they refuse to grant it. And it is now the city’s legal burden to prove why the project should not be approved, rather than the traditional situation where the developer has to prove why his project should be approved.
Adding to this loss of local planning control are provisions for CEQA streamlining found in both SB375 and SB226. A qualified project can receive streamlining benefits (be exempt from certain CEQA criteria and studies) or be exempted entirely from CEQA requirements if it is categorized as “infill” and in proximity to a “quality transit corridor” (near a bus stop where a bus runs every 20 minutes).
TOD Is “Green” Because SB375 Told Us So
SB375 contains a number of legally significant, though completely false, statements about environmental impacts, that shaped Plan Bay Area and will shape other legislation and public funding and political processes for decades to come. Among those definitive statements presented as facts, are the percentages of greenhouse gases (GHGs) emitted by cars and light trucks, and how Transit Oriented Development (TOD) mitigates those GHG emissions. Forget that ABAG and MTC’s methods of calculating GHG emissions were based on data that is more than a decade old, that they did not account for the new 54.5 MPG CAFE mileage standards, or the existence and positive impacts of hybrid cars and trucks. In fact, the Plan’s GHG assumptions weren’t even true in 2008 when SB375 was signed, much less now, five years later. But it doesn’t matter. It is what it is because Sacramento says it is.
All those non-scientific methods and assumptions are now incorporated into Plan Bay Area.
And forget that the Plan’s jobs and population projections used to calculate future growth for Marinare seriously flawed. And forget that every local, independent analysis fails to find any way to substantiate the jobs and population growth projections it relies on. And that the unfortunate lesson of 2008 is that cities that build housing without jobs growth end up bankrupt (Vallejo, Stockton, Modesto, San Bernardino, et al). Or that Marin hasn't had any significant jobs growth in 20 years so it's highly unlikely that in the present economic climate, with the majority of higher paying jobs, like tech jobs, rapidly moving out of California to places like Phoenix, Austin, Charlotte and Atlanta, that this trend will change any time soon.
It’s the law and it’s embodied in Plan Bay Area. I guess if the state legislature decides that red is green, and yellow is blue, then it’s so and you can be penalized and sued for disagreeing.
But probably worst of all, SB375 goes the additional step of legally defining high density, transit oriented housing development (TOD) as environmentally beneficial. This is new and has widespread legal implications. Mind you, SB375 does this without requiring any minimum building standards or “green” qualifiers (i.e. LEED Standards, National Association of Homebuilders Green Standards, etc.).
So regardless of what methods are used to construct buildings, if the project is high density TOD, it’s now legally environmentally beneficial and therefore can benefit from other existing environmental legislation… and previously inaccessible pools of money.
In Plain English
So what does all this mean in my sleepy little town? Under Plan Bay Area, in combination with SB375 and SB226:
- An out of town developer who has an "interest" (e.g. an option to purchase) in a qualifying project can show up, propose a project and force your city to give him high density zoning rights (30 units per acre, qualifying plus density bonuses and variances).
- The portion of his project that is affordable will be automatically exempt from most local property taxes for schools, infrastructure and city services (fire, police, sewer, parks, etc.).
- The developer can take it as a statutory fact that his project will assist in reducing greenhouse gases regardless of whether or not he’s building the same bricks and sticks structures he’s been building for decades.
- Because of this he will be exempt from any CEQA requirements, studies or review (traffic, pollution, etc.) or addressing local growth impacts (water, sewer, schools, police and fire protection, etc.).
- Because of this he can deal directly with a variety of JPAs and government agencies to solicit tax credits, grants and other financial assistance.
- And he can sue your city to get all these things if he’s denied.
On the city’s side, we have our building codes and our typically amateurish design review process left to protect our community. Oh, and I forgot. CEQA or design review arguments about aesthetics or views or community “character” are no longer allowed under these new laws.
It’s pretty clear that all the reassuring wording in the world, in Plan Bay Area and SB375’s SEC. 4, about how the law does not require local governments to adapt their General Plans is really just a pleasant, political fiction. All grandstanding pronouncements by ABAG, MTC, our County Supervisors, and affordable housing nonprofits to the contrary, our local General Plans and our local zoning ordinances are, for all practical purposes, now required to comply with SB375 and SB226 and RHNA, which must be and are directly aligned (verbatim) with Housing Element laws and the goals of the Sustainable Communities Strategy: aka Plan Bay Area.
Checkmate.
This is what knowledgeable critics mean when they say Plan Bay Area results in a loss of local control.