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GreenWood Investors: The Monopolist’s Curse: United Fruit Company

This article is the 4th in a 6-part series by GreenWood Investors, examining how the drivers of value creation are the same as sustainability drivers. We outline these drivers in these 6 posts and show how recent ESG efforts to define business sustainabil

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3 years ago

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United Fruit Company

This article is the 4th in a 6-part series by GreenWood Investors, examining how the drivers of value creation are the same as sustainability drivers. We outline these drivers in these 6 posts and show how recent ESG efforts to define business sustainability fall very short.

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The Monopolist’s Curse: United Fruit Company

The very odd Covid-modified holiday period had me unusually nostalgic for past Christmases, where traditions were supplemented by a longer reading list, with a particular focus on the period following the last major global pandemic. In the more recent past, my aunt and I had a tradition of playing Monopoly. My aunt is a guidance counselor, and an incredibly loving human being who has helped tens of thousands of children over the past four decades cope with becoming young adults. Not an enviable task.

But when it came to playing Monopoly, maintaining this gracious posture made for an incredibly rewarding counter-party. At an early age, I figured out how to compound my board game profits and even leverage up to continue to build as quickly as possible. I was ruthless when it came to board domination, often leaving a tense dynamic in the hours ensuing the game.

But my aunt learned quickly, and met this young ruthless monopolist with an equally hardened business demeanor. She learned survival in a world where her economic counter-parties were going to take what they could and leave little behind. She adapted, but for a few hours, gone was the loving and joy filled aunt that I loved.

As I later learned, it turns out fighting monopolies may be a dormant gene in my family. My grandmother’s Vaccaro family built the Standard Fruit Company in New Orleans- a challenger to the dominant banana monopoly of the early 1900s, United Fruit Company based in Boston (now operating under the Chiquita brand).

In her final years, my grandmother’s near-term memory lapsed, but her long-term memory had her recalling vivid scenes from her childhood in the 1920s. Rolls-Royces with chauffeurs, tales from the ice machines at the Port of New Orleans and getting to play a sort of Eloise at what is now the Roosevelt Hotel (which used to be the Vaccaro Hotel) provided the backdrop for very rich memories. Not glamorous was the hard truth that this family got sucked into the stock bubble of the late 1920s and lost the entire business due to stock trading.

That’s another useful lesson, and particularly timely in this moment, but requires a separate conversation. United Fruit scooped it up for next to nothing. That company is now the Dole Fruit Company. It was a particularly hard Depression for her and her family.

Becoming a Whale

An incredibly well-told tale, The Fish That Ate the Whale, talks of a similar immigrant entrepreneur that not only took on the monopolist United Fruit Company, but ended up taking over its management in a proxy contest. Sam Zemurray of Cuyamel fruit company was the epitome of an owner operator, he was on the ground with his guys in the fields. He personally scouted for land overlooked by others. In the evenings during harvest, he would drink with the plantation workers. My favorite parts of this book captured how Sam was able to gain critical advantages versus the monopolist United Fruit by spending most of his time testing different varieties, plots of land, shipping methods and fighting off bureaucratic impulses of his growing fruit company.

“He was respected because he understood the trade. By the time he was forty, he had served in every position, from fruit jobber to boss. He worked on the docks, on the ships and railroads, in the fields and warehouses. He had ridden the mules, he had managed the fruit and money, the mercenaries and government men, he understood the meaning of every change the weather, the significance of every date on the calendar.

There was not a job he could not do, nor a task he could not accomplish. He considered it a secret of his success. He was up every morning at dawn, having breakfast, standing on his head, walking in the fields. As far as possible, he refrained from giving interviews, addressing shareholders or attending functions, all of which took him away from his work. He was one of those men who toiled all day and every day until they had to be rolled away in a chair.” 

All of the most talented managers in the banana trade left UF and “flocked” to Zemurray’s Cuyamel. Its stock price kept rising, and he kept redeploying all profits back into new business development while UF’s kept languishing. This stood in very stark contrast to the “mothership” management style of United Fruit and the dividend maximization for shareholders.

Watching Cuyamel rapidly erode its strangle on the industry, UF took out his Cuyamel business for a very fancy price, and made this swashbuckling immigrant an offer he couldn’t refuse. But very soon after the 1929 buyout, Zemurray’s entire net worth, then converted into UF shares, collapsed.

It turned out even hiding in a monopoly wouldn’t help mitigate the disastrous consequences of 1929 stock market bubble. The management floundered and results deteriorated very considerably despite having taken out its two challenging banana traders Cuyamel and Standard. Irritated to say the least, Sam mounted a proxy contest, being the largest shareholder of the company, and forced out management and then replaced the board.

“It was a marriage of opposites… Zemurray’s personal style, as well as his operating practices, were completely contrary to the traditions of United Fruit. Zemurray had lived in the tropics and had personally pioneered many of the practices in agriculture and engineering which became the standards for the industry. By contrast, the management of the United Fruit company had been content, for the most part, to sit in Boston and count the money, and watch bananas grow with the same detachment with which an actuary watches the growth and death of populations.” 

But after Sam overtook the management of United Fruit, he resorted to more aggressive management tactics. He spurred coups against governments that were unfavorable to the land holdings of UF.

As author Rich Cohen wrote in the preface talking about UF under Zemurray’s leadership, “United Fruit in its day was as ubiquitous as Google and as feared as Halliburton. More than business, it was the spirit of the nation abroad, akin to the Dutch East India company. Its policies backed by the threat of US Gunboats. As the president of UF, Zemurray became the most important man in Central America. He could change the course of history with a phone call. A symbol of the best and worst of the United States. Proof that America is the land of opportunity but also a classic example of the ugly American, the corporate pirate who treats foreign nations as the backdrop for his adventures.”

Becoming Over Being

We often hear investors talk about their desire to invest in unregulated monopolies. This sounds understandable at first, particularly from the perspective of someone who had learned the trick to the game Monopoly at an early age. But it’s ill advised. Monopolies are most typically post-growth businesses. Zemurray built his fortune as he challenged the monopoly, not after his business was gobbled up by the whale.

As a monopoly, by definition there are no more growth opportunities outside of overall market growth or abusing your power. Fortunes are built as companies become so essential that they naturally become monopolies. While monopolies can protect a fortune, they often guarantee its long-term obsolescence and irrelevance.

After its market share reached near 100%, growth was very hard to come by. This led Zemurray and UF into very ugly territory. The company fomented wars and was largely responsible for the “banana republic” instability of governments in Central America. By 1940, the company owned half of all private land in Honduras even though it cultivated less than 10%. “It became a symbol of concentrated wealth, more powerful than the government itself.”

This abuse of that power that monopolies allow, almost always leads to a stagnant “bean counting” culture that Zemurray found in Boston. Parker Brothers and the creators of Monopoly were trying to expose the inadvertent ruthless behaviors that inherently emerge as business enterprises seek commercial scale without moderation. While we can criticize it when we find it in others, the most honest of us will admit we all have these tendencies. Even a middle school guidance counselor, when push came to shove. Knowing how far to push something is not something humans are very good at, as we see in today’s marketplace so starkly. Relying on bottom-brain, ego tactics, which commercialization requires, has felled an incredible number of value creators over the ages.

And there is overwhelming evidence that today’s newest vintage of monopolizing tech firms are increasingly resorting to predatory tactics that have caused its forbearer monopolies to stagnate and decay. The antitrust regulators around the world and attorneys general everywhere have been unleashing a wave of suits against Google in particular, a firm which hides behind its very pro-consumer stance to eviscerate competing AdTech firms.

Google has added a tremendous amount of wealth to its share-owners, and more importantly, to the process of information discovery, but the easy low-hanging bananas have been thoroughly picked over by its traffic monetization strategy. Growth from this point on requires increasingly aggressive behavior, risking a destruction of the ecosystem they have so carefully cultivated over the past two decades.

The last major leg of growth for Google will come as it eliminates the cookie, takes even further market share and closes in on a monopoly position in the digital ad industry. While Facebook is a credible second place, its agreement with Google to not run competitive tools while receiving prioritized inventory, ensures these two are functioning in complete harmony from a competitive standpoint.

Hitting Refresh

While many can argue whether or not Google is there, we believe it is still one or two years away, let’s look at the first modern tech monopoly to emerge: Microsoft.

Until the birth of the mobile computing and mobile operating systems, few would deny Microsoft had a monopoly position on personal computer operating software, and even basic business tools. There was essentially no competition, particularly into the latter part of the 1990s, which is when noticeable cracks in its competitiveness first started emerging. Windows refreshes continued to deteriorate and its tools and platform became increasingly crash-prone and difficult to use.

And until mobile ecosystems overtook desktop as the consumers’ primary computing tool, shareholders could have been forgiven for not noticing the very apparent stagnation in the company’s competitiveness. Revenue continued to grow at double-digit rates as its monopoly position allowed it to lift prices and force desktop upgrades, which to the user felt more like downgrades.

But in the wake of Apple introducing the iPhone, the subsequent decade saw Microsoft struggling to even generate mid-single-revenue growth in a rapidly growing computing industry. As late as 2013, the stock price was sitting around the same levels as 1998, the year after the department of Justice sued the company for monopolist practices, after Apple had very clearly lost its PC war against the company.

It wasn’t until Satya Nadella took over management of Microsoft in early 2014 that the company was able to return to double-digit growth and the market rewarded it with a higher stock valuation. He completely pivoted away from the monopolistic position and “hit refresh” as his book is titled.

He completely divorced the Azure cloud platform from Windows and opened Office products up for use on any platform. It was a radical pivot away from “mothership management” to an embrace of an ecosystem approach. Customers responded accordingly, with its software and platforms more readily used on their technology of choice, and Satya reignited top line growth, sending shares quintupling as he opened up the closed ecosystem and embraced competition.

What Matters Can’t All Be Measured

“Cecil Graham: What is a cynic?

Lord Darlington: A man who knows the price of everything, and the value of nothing.

Cecil Graham: And a sentimentalist, my dear Darlington, is a man who sees an absurd value in everything and doesn’t know the market price of any single thing.”

- Oscar Wilde, Lady Windermere’s Fan

While economics is a useful social science, it is numerically-oriented, which makes it a particularly poor science for understanding and measuring welfare. As the seemingly infinite value of a loving mother’s care of her children will attest, we do a pretty poor job in the economic world of measuring human welfare. The value of my aunt’s career as a guidance counselor for 35 years cannot be measured solely by the dollars she was paid over that time period. The value she has created to society surely cannot be measured in dollars, which is why in the 1930s, the marginal utility theorists largely gave up and accepted consumption as the best proxy for measuring this welfare or utility.

As Mariana Mazzucato points out in her thought-provoking work The Value of Everything, “Underlying this common sense approach to household work is the utility theory of value: what is valuable is what is exchanged on the market. This implicit production boundary is determined by whether money changes hands for the service. Therefore, there is extreme difficulty in giving a value to work done by women or men who do not receive a wage in exchange for it.” She goes on to explain the inherent limitations in how we measure progress.

“If value is defined by price, set by the supposed forces of supply and demand, then as long as an activity fetches a price, it is seen as creating value. So if you earn a lot, you must be a value creator. I will argue that the way the word value is used in modern economics has made it easier for value extracting activities to masquerade as value creating activities, and in the process, rents on earned income get confused with profits- earned income. Inequality rises and investment in the real economy falls.

What’s more, if we cannot differentiate value creation from value extraction, it becomes nearly impossible to reward the former over the latter. If the goal is to produce growth that is more innovation-led, smart growth, more inclusive and more sustainable, we need a better understanding of value.”

In her work Mariana exposes the perversion of how we measure value creation by showing Wall Street activities, which are largely a tax on wealth transfers, are considered value-additive in the current GDP calculations. If a real estate agent charges less for their services for the same activity, the productivity of the economy improves. But if Wall Street charges less for transactions and lending, it is counted as a deterioration in economic activity. Accordingly, we are rewarding value extraction, perhaps at the expense of value creation. It sounds very similar to the fact that companies can report banner earnings per share figures while also deteriorating the fundamental resilience of their businesses.

Our score card for value creation is inherently limited by the math we use. That is what the ESG (Environmental, Social and Governance) movement is trying to solve for. There are considerable differences between sustainable value creation and the reported earnings of a company.

Mariana’s work is at times one-sided, as she tellingly chose to remove the last line of Oscar Wilde’s famous passage from Lady Windermere’s Fan which exposes the flaws of ignoring mathematical reason. But her thinking is fresh and creative, and in a world dominated by GDP measurements and stock prices serving as proxies for value created, she has a very important point. There are a tremendous number of highly important effects of our actions that simply cannot be measured in economic units of value.

While customer happiness and employee engagement partially show up in the growth trajectory of a company’s income statement, the externalities, or side of effects or consequences of the company’s activities are surely not showing up in the profit & loss accounts. It is the requisite role of governments to set regulatory policies that will reflect these externalities into economic governance. These regulatory conditions are most effective when they use the same market forces that help determine prices and distribution of goods and services.

Carbon cap and trade was quickly written off as a failure after its introduction in the European union, as carbon prices fell dramatically after markets were established in 2005. But after the economy grew into the allocated credits, carbon markets have staged a material come-back and represent a real financial burden to the carbon polluters on the continent. Effectively, the price of the emissions are now factored into the underlying sales price of the product or service.

The Limits of Regulation

But as Zemurray showed in United Fruit, when companies transcend borders, the government will have less influence over the complete range of its activities, a limitation that is particularly exposed today. When the Justice Department sued United Fruit for violations of the Sherman Antitrust Act, the Supreme Court ruled that it didn’t have the proper authority to judge the merits of the case, as nearly all of its activities happened outside of US borders. Thus, multinationals are inherently more difficult to regulate and thus have an even greater responsibility to minimize its own externalities. As the incentives of the Parker Brothers Monopoly game remind us, they rarely do so.

Regulation also has a deeply anti-competitive side effects. Regulators love to create multiple-thousands of pages of rules for companies to adhere to. This eliminates the ability for any small challenger firm to compete on the same playing field as the gorillas with their legions of lawyers. Big banks actually loved Dodd-Frank while the “walled gardens” of Facebook and Google actually loved the GDPR regulations. It strengthened their monopolist control on ad targeting.

Further, what regulation enthusiasts around the world fail to realize regularly is that for underlying patterns of human behavior to change, economic forces must play a pivotal role in their adoption. Electric vehicles (EVs) largely failed to gain any traction until the tax credits made it economically viable.

But EVs didn’t gain popular attention until Tesla made them sexy. I remember at the time we owned Ferrari as a standalone company, in late 2015, it was already popularly proclaimed that Teslas turn more heads in town than a Ferrari. Musk made the EV sexy, and humans don’t behave according to their rational minds. Particularly as a consumer, they make choices with their emotional minds. The mind of the marketplace. The bottom part of the brain.

So while the intention of the ESG investor movement is particularly noble and well-intentioned, it doesn’t have legs for delivering on its promises unless it becomes an integral part of the business strategy and market approach. Sustainability is not a box-checking exercise, where companies can implement “best practices” set by lawyers and consultants.

Nikola Motors has an incredible board of directors, multiple long-term industrial partners, and came to market at a particularly lucky moment when EV stocks were being traded like the Pets.com’s of 1999. It sought to address an under-served part of the EV market, but as Hindenburg Research showed, it was largely a castle built on sand. Nikola checked nearly all the ESG buckets, but it was the polar opposite of a sustainable company.

The herd movement into these stocks over the past few years have driven valuations roughly three standard deviations above their post-GFC trading range. There will be many more Nikolas taking advantage of these exceptionally frothy conditions, given this undiscerning stampede of capital. That possibly risks the sustainability of this wave of sustainable investing as merely a fad.

Exhibit 1: Fund Flows & Equity Valuations for ESG Companies

Source: JP Morgan

Even Mazzucato admitted, after arguing for the virtues of separating shareholders from the governance of the company, in an attempt to check the greed impulse, this view faced a stunning defeat in the wake of the Volkswagen diesel-gate scandal. “The car-maker boasted several attributes which agency theorists consider helpful for far-sighted investment and honest practice: widening the shareholder base and extending its interests beyond short-term profits. German workers, who would have little to gain from tricking US consumers, had a powerful say in the company’s affairs. A family holding company, a German state, and a Middle Eastern sovereign fund control 90% of the shareholder votes. All are very long term investors.”

The regulatory response to Dieselgate outside of the United States was hardly inspiring. German regulators led the response in Europe for the company, where it sold 20x more faulty vehicles, which basically slapped the company’s wrist and allowed for a software change, which a UK class action lawsuit alleges did not even solve the emissions problem for 70% of all journeys in England.

Volkswagen imposed a significant negative externality onto the populations of the affected areas: as NOx emissions have been linked to very harmful health side effects. But if we can’t count on regulators to impose responsibilities on companies that break the spirit of the law, if we can’t count on ESG standards, what can we count on?

The Responsibility of Freedom

“Strictly speaking, shareholder value is the dumbest idea in the world.” - Jack Welch

After spending many of the past years searching for the silver bullet to value creation, I’ve come to admit, there is no magic formula. As Sir Martin Sorrell said in a conversation with our investors in December 2020, “you know it when you see it.” There are patterns of behavior that rhyme between value creators and long-term focused managers. The tenets of value creation are in harmony with those of sustainability – for there is no long-term value creation if that process is not also sustainable.

But while there’s no silver bullet, ensuring that management is not divorced of the long-term ownership of the company goes a long way to fostering the most sustainable businesses. Owner managed firms shun a lot of the casino capitalism traits, and in particularly the quarterly guidance charade. They conduct less mergers & acquisitions and they invest more in their people and core businesses. But as Sam Zemurray showed at United Fruit, this also isn’t a silver bullet. His scrappy bottom-up management style buckled under the weight of having to manage the octopus that acquired his firm. He ended up presiding over more than a few decisions that would have been given a clear F-rating from a sustainability perspective.

Even still, as Credit Suisse showed in its most recent research on Family-controlled companies, the largest 1,000 global family controlled businesses have consistently scored above average on environmental and social scores. Unfortunately the proxy advisory firms and popular wisdom still claim that having controlling shareholders or families is considered a “negative” versus the agency model that Mazzucato and many of her colleagues promote. Thus, these family controlled businesses score low on “governance” criteria, while still trouncing their peers on the overall factors.

Exhibit 2: Credit Suisse’s Family 1000 ESG Performance

Source: Credit Suisse

In his highly enjoyable tale about co-founding Netflix, Marc Randolph talked about this cultural dichotomy that he tries to balance as a manager. While Netflix’s culture is now famous and has been made into a widely circulated powerpoint presentation, there were no stated principles in the beginning. There was no mission statement. The culture developed organically.

The team embodied the principles as opposed to codifying the principles on paper. Randolph talked about how his former employer Borland had all the perks in the world, with a very honorable mission statement, but they didn’t feel at all connected to it. It was a nanny state, or what I’ve called “mothership management” style. Writing in That Will Never Work, he explained.

“I knew that I, and everyone else on the initial team, would thrive if given a lot of work to do and a lot of space to do it. That was really all our culture amounted to. Handpick a dozen brilliant creative people, given them a set of delicious problems to solve, and then give them space to solve them. Netflix would eventually codify this as ‘freedom and responsibility.’ But that was years later. At the time, it was just how we did things. We didn’t have set hours for work. You could come in when you wanted, leave when you wanted. You were being judged by what you could accomplish.”  

While Randolph was talking about his management style as a serial startup founder, he could have as easily been talking about an ideal approach to the regulation of companies. Those that embody a natural responsibility in their approach to their customers, employees, communities and the environment around them deserve the freedom to operate more independently. But they must still generate respectable returns for investors. That is actually the first requisite, as Adam Smith espoused in his founding text for the entire field of economics.

While I’m personally intrigued by Danone’s efforts to become the world’s largest B-corp, which seeks to balance the needs of all stakeholders as opposed to just the stockholders, the languid development of the business over the past few years and the corresponding even worse returns for its owners bode poorly for many other companies following in their footsteps. This is not a great development for the ESG investment movement as, like Volkswagen, it was such a high profile case study. Perhaps Danone needed to focus on the financials a bit more than creating its kumbaya supply chain.

On the other hand, those that focus on shareholder value at the expense of all of these other stakeholders, as most monopolies do, and as GE did for decades under Jack Welch, deserve more scrutiny and probably more regulatory restrictions. When looking back on his career, Welch caveated that shareholder value maximization, on its own, doesn’t make sense. It needs to be taken into context of everything else the firm was doing. This was a shocking confession from the manager who most popularized the concept.

I think we can take a lesson from Oscar Wilde’s complete quote from above, not just the first sentence about the man who knows the price of everything, but the value of nothing. Not all things that matter can be measured, that is very clear. And that, by and large, is the goal of the well-intentioned ESG movement. But the traditional measurements we use to understand a business’s value added still very much matter, no matter how incomplete the snapshots are.

Perhaps the answer lies in balancing these two extremes, or at least knowing when one or the other is most appropriate. As we age, our responsibilities continue to evolve. So too, must the evolution of a firm. Success demands increased levels of responsibility. Today’s rising monopolies show varying degrees of social responsibility but are largely giving little attention to the subject. Their long-term values demand they rise to the occasion.

“The price of greatness is responsibility.” -- Winston Churchill

The post GreenWood Investors: The Monopolist’s Curse: United Fruit Company appeared first on ValueWalk.

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The Coming Of The Police State In America

The Coming Of The Police State In America

Authored by Jeffrey Tucker via The Epoch Times,

The National Guard and the State Police are now…

Published

14 hours ago

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March 9, 2024

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The Coming Of The Police State In America

Authored by Jeffrey Tucker via The Epoch Times,

The National Guard and the State Police are now patrolling the New York City subway system in an attempt to do something about the explosion of crime. As part of this, there are bag checks and new surveillance of all passengers. No legislation, no debate, just an edict from the mayor.

Many citizens who rely on this system for transportation might welcome this. It’s a city of strict gun control, and no one knows for sure if they have the right to defend themselves. Merchants have been harassed and even arrested for trying to stop looting and pillaging in their own shops.

The message has been sent: Only the police can do this job. Whether they do it or not is another matter.

Things on the subway system have gotten crazy. If you know it well, you can manage to travel safely, but visitors to the city who take the wrong train at the wrong time are taking grave risks.

In actual fact, it’s guaranteed that this will only end in confiscating knives and other things that people carry in order to protect themselves while leaving the actual criminals even more free to prey on citizens.

The law-abiding will suffer and the criminals will grow more numerous. It will not end well.

When you step back from the details, what we have is the dawning of a genuine police state in the United States. It only starts in New York City. Where is the Guard going to be deployed next? Anywhere is possible.

If the crime is bad enough, citizens will welcome it. It must have been this way in most times and places that when the police state arrives, the people cheer.

We will all have our own stories of how this came to be. Some might begin with the passage of the Patriot Act and the establishment of the Department of Homeland Security in 2001. Some will focus on gun control and the taking away of citizens’ rights to defend themselves.

My own version of events is closer in time. It began four years ago this month with lockdowns. That’s what shattered the capacity of civil society to function in the United States. Everything that has happened since follows like one domino tumbling after another.

It goes like this:

1) lockdown,

2) loss of moral compass and spreading of loneliness and nihilism,

3) rioting resulting from citizen frustration, 4) police absent because of ideological hectoring,

5) a rise in uncontrolled immigration/refugees,

6) an epidemic of ill health from substance abuse and otherwise,

7) businesses flee the city

8) cities fall into decay, and that results in

9) more surveillance and police state.

The 10th stage is the sacking of liberty and civilization itself.

It doesn’t fall out this way at every point in history, but this seems like a solid outline of what happened in this case. Four years is a very short period of time to see all of this unfold. But it is a fact that New York City was more-or-less civilized only four years ago. No one could have predicted that it would come to this so quickly.

But once the lockdowns happened, all bets were off. Here we had a policy that most directly trampled on all freedoms that we had taken for granted. Schools, businesses, and churches were slammed shut, with various levels of enforcement. The entire workforce was divided between essential and nonessential, and there was widespread confusion about who precisely was in charge of designating and enforcing this.

It felt like martial law at the time, as if all normal civilian law had been displaced by something else. That something had to do with public health, but there was clearly more going on, because suddenly our social media posts were censored and we were being asked to do things that made no sense, such as mask up for a virus that evaded mask protection and walk in only one direction in grocery aisles.

Vast amounts of the white-collar workforce stayed home—and their kids, too—until it became too much to bear. The city became a ghost town. Most U.S. cities were the same.

As the months of disaster rolled on, the captives were let out of their houses for the summer in order to protest racism but no other reason. As a way of excusing this, the same public health authorities said that racism was a virus as bad as COVID-19, so therefore it was permitted.

The protests had turned to riots in many cities, and the police were being defunded and discouraged to do anything about the problem. Citizens watched in horror as downtowns burned and drug-crazed freaks took over whole sections of cities. It was like every standard of decency had been zapped out of an entire swath of the population.

Meanwhile, large checks were arriving in people’s bank accounts, defying every normal economic expectation. How could people not be working and get their bank accounts more flush with cash than ever? There was a new law that didn’t even require that people pay rent. How weird was that? Even student loans didn’t need to be paid.

By the fall, recess from lockdown was over and everyone was told to go home again. But this time they had a job to do: They were supposed to vote. Not at the polling places, because going there would only spread germs, or so the media said. When the voting results finally came in, it was the absentee ballots that swung the election in favor of the opposition party that actually wanted more lockdowns and eventually pushed vaccine mandates on the whole population.

The new party in control took note of the large population movements out of cities and states that they controlled. This would have a large effect on voting patterns in the future. But they had a plan. They would open the borders to millions of people in the guise of caring for refugees. These new warm bodies would become voters in time and certainly count on the census when it came time to reapportion political power.

Meanwhile, the native population had begun to swim in ill health from substance abuse, widespread depression, and demoralization, plus vaccine injury. This increased dependency on the very institutions that had caused the problem in the first place: the medical/scientific establishment.

The rise of crime drove the small businesses out of the city. They had barely survived the lockdowns, but they certainly could not survive the crime epidemic. This undermined the tax base of the city and allowed the criminals to take further control.

The same cities became sanctuaries for the waves of migrants sacking the country, and partisan mayors actually used tax dollars to house these invaders in high-end hotels in the name of having compassion for the stranger. Citizens were pushed out to make way for rampaging migrant hordes, as incredible as this seems.

But with that, of course, crime rose ever further, inciting citizen anger and providing a pretext to bring in the police state in the form of the National Guard, now tasked with cracking down on crime in the transportation system.

What’s the next step? It’s probably already here: mass surveillance and censorship, plus ever-expanding police power. This will be accompanied by further population movements, as those with the means to do so flee the city and even the country and leave it for everyone else to suffer.

As I tell the story, all of this seems inevitable. It is not. It could have been stopped at any point. A wise and prudent political leadership could have admitted the error from the beginning and called on the country to rediscover freedom, decency, and the difference between right and wrong. But ego and pride stopped that from happening, and we are left with the consequences.

The government grows ever bigger and civil society ever less capable of managing itself in large urban centers. Disaster is unfolding in real time, mitigated only by a rising stock market and a financial system that has yet to fall apart completely.

Are we at the middle stages of total collapse, or at the point where the population and people in leadership positions wise up and decide to put an end to the downward slide? It’s hard to know. But this much we do know: There is a growing pocket of resistance out there that is fed up and refuses to sit by and watch this great country be sacked and taken over by everything it was set up to prevent.

Tyler Durden Sat, 03/09/2024 - 16:20

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Another beloved brewery files Chapter 11 bankruptcy

The beer industry has been devastated by covid, changing tastes, and maybe fallout from the Bud Light scandal.

Published

20 hours ago

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March 9, 2024

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Before the covid pandemic, craft beer was having a moment. Most cities had multiple breweries and taprooms with some having so many that people put together the brewery version of a pub crawl.

It was a period where beer snobbery ruled the day and it was not uncommon to hear bar patrons discuss the makeup of the beer the beer they were drinking. This boom period always seemed destined for failure, or at least a retraction as many markets seemed to have more craft breweries than they could support.

Related: Fast-food chain closes more stores after Chapter 11 bankruptcy

The pandemic, however, hastened that downfall. Many of these local and regional craft breweries counted on in-person sales to drive their business. 

And while many had local and regional distribution, selling through a third party comes with much lower margins. Direct sales drove their business and the pandemic forced many breweries to shut down their taprooms during the period where social distancing rules were in effect.

During those months the breweries still had rent and employees to pay while little money was coming in. That led to a number of popular beermakers including San Francisco's nationally-known Anchor Brewing as well as many regional favorites including Chicago’s Metropolitan Brewing, New Jersey’s Flying Fish, Denver’s Joyride Brewing, Tampa’s Zydeco Brew Werks, and Cleveland’s Terrestrial Brewing filing bankruptcy.

Some of these brands hope to survive, but others, including Anchor Brewing, fell into Chapter 7 liquidation. Now, another domino has fallen as a popular regional brewery has filed for Chapter 11 bankruptcy protection.

Overall beer sales have fallen.

Image source: Shutterstock

Covid is not the only reason for brewery bankruptcies

While covid deserves some of the blame for brewery failures, it's not the only reason why so many have filed for bankruptcy protection. Overall beer sales have fallen driven by younger people embracing non-alcoholic cocktails, and the rise in popularity of non-beer alcoholic offerings,

Beer sales have fallen to their lowest levels since 1999 and some industry analysts

"Sales declined by more than 5% in the first nine months of the year, dragged down not only by the backlash and boycotts against Anheuser-Busch-owned Bud Light but the changing habits of younger drinkers," according to data from Beer Marketer’s Insights published by the New York Post.

Bud Light parent Anheuser Busch InBev (BUD) faced massive boycotts after it partnered with transgender social media influencer Dylan Mulvaney. It was a very small partnership but it led to a right-wing backlash spurred on by Kid Rock, who posted a video on social media where he chastised the company before shooting up cases of Bud Light with an automatic weapon.

Another brewery files Chapter 11 bankruptcy

Gizmo Brew Works, which does business under the name Roth Brewing Company LLC, filed for Chapter 11 bankruptcy protection on March 8. In its filing, the company checked the box that indicates that its debts are less than $7.5 million and it chooses to proceed under Subchapter V of Chapter 11. 

"Both small business and subchapter V cases are treated differently than a traditional chapter 11 case primarily due to accelerated deadlines and the speed with which the plan is confirmed," USCourts.gov explained. 

Roth Brewing/Gizmo Brew Works shared that it has 50-99 creditors and assets $100,000 and $500,000. The filing noted that the company does expect to have funds available for unsecured creditors. 

The popular brewery operates three taprooms and sells its beer to go at those locations.

"Join us at Gizmo Brew Works Craft Brewery and Taprooms located in Raleigh, Durham, and Chapel Hill, North Carolina. Find us for entertainment, live music, food trucks, beer specials, and most importantly, great-tasting craft beer by Gizmo Brew Works," the company shared on its website.

The company estimates that it has between $1 and $10 million in liabilities (a broad range as the bankruptcy form does not provide a space to be more specific).

Gizmo Brew Works/Roth Brewing did not share a reorganization or funding plan in its bankruptcy filing. An email request for comment sent through the company's contact page was not immediately returned.

 

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Government

Students lose out as cities and states give billions in property tax breaks to businesses − draining school budgets and especially hurting the poorest students

An estimated 95% of US cities provide economic development tax incentives to woo corporate investors, taking billions away from schools.

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2 days ago

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March 8, 2024

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Exxon Mobil Corp.'s campus in East Baton Rouge Parish, left, received millions in tax abatements to the detriment of local schools, right. Barry Lewis/Getty Images, Tjean314/Wikimedia

Built in 1910, James Elementary is a three-story brick school in Kansas City, Missouri’s historic Northeast neighborhood, with a bright blue front door framed by a sand-colored stone arch adorned with a gargoyle. As bustling students and teachers negotiate a maze of gray stairs with worn wooden handrails, Marjorie Mayes, the school’s principal, escorts a visitor across uneven blue tile floors on the ground floor to a classroom with exposed brick walls and pipes. Bubbling paint mars some walls, evidence of the water leaks spreading inside the aging building.

“It’s living history,” said Mayes during a mid-September tour of the building. “Not the kind of living history we want.”

The district would like to tackle the US$400 million in deferred maintenance needed to create a 21st century learning environment at its 35 schools – including James Elementary – but it can’t. It doesn’t have the money.

Property tax redirect

The lack of funds is a direct result of the property tax breaks that Kansas City lavishes on companies and developers that do business there. The program is supposed to bring in new jobs and business but instead has ended up draining civic coffers and starving schools. Between 2017 and 2023, the Kansas City school district lost $237.3 million through tax abatements.

Kansas City is hardly an anomaly. An estimated 95% of U.S. cities provide economic development tax incentives to woo corporate investors. The upshot is that billions have been diverted from large urban school districts and from a growing number of small suburban and rural districts. The impact is seen in districts as diverse as Chicago and Cleveland, Hillsboro, Oregon, and Storey County, Nevada.

The result? A 2021 review of 2,498 financial statements from school districts across 27 states revealed that, in 2019 alone, at least $2.4 billion was diverted to fund tax incentives. Yet that substantial figure still downplays the magnitude of the problem, because three-quarters of the 10,370 districts analyzed did not provide any information on tax abatement agreements.

Tax abatement programs have long been controversial, pitting states and communities against one another in beggar-thy-neighbor contests. Their economic value is also, at best, unclear: Studies show most companies would have made the same location decision without taxpayer subsidies. Meanwhile, schools make up the largest cost item in these communities, meaning they suffer most when companies are granted breaks in property taxes.

A three-month investigation by The Conversation and three scholars with expertise in economic development, tax laws and education policy shows that the cash drain from these programs is not equally shared by schools in the same communities. At the local level, tax abatements and exemptions often come at the cost of critical funding for school districts that disproportionately serve students from low-income households and who are racial minorities.

In Missouri, for example, in 2022 nearly $1,700 per student was redirected from Kansas City public and charter schools, while between $500 and $900 was redirected from wealthier, whiter Northland schools on the north side of the river in Kansas City and in the suburbs beyond. Other studies have found similar demographic trends elsewhere, including New York state, South Carolina and Columbus, Ohio.

The funding gaps produced by abated money often force schools to delay needed maintenance, increase class sizes, lay off teachers and support staff and even close outright. Schools also struggle to update or replace outdated technology, books and other educational resources. And, amid a nationwide teacher shortage, schools under financial pressures sometimes turn to inexperienced teachers who are not fully certified or rely too heavily on recruits from overseas who have been given special visa status.

Lost funding also prevents teachers and staff, who often feed, clothe and otherwise go above and beyond to help students in need, from earning a living wage. All told, tax abatements can end up harming a community’s value, with constant funding shortfalls creating a cycle of decline.

Incentives, payoffs and guarantees

Perversely, some of the largest beneficiaries of tax abatements are the politicians who publicly boast of handing out the breaks despite the harm to poorer communities. Incumbent governors have used the incentives as a means of taking credit for job creation, even when the jobs were coming anyway.

“We know that subsidies don’t work,” said Elizabeth Marcello, a doctoral lecturer at Hunter College who studies governmental planning and policy and the interactions between state and local governments. “But they are good political stories, and I think that’s why politicians love them so much.”

Academic research shows that economic development incentives are ineffective most of the time – and harm school systems.

While some voters may celebrate abatements, parents can recognize the disparities between school districts that are created by the tax breaks. Fairleigh Jackson pointed out that her daughter’s East Baton Rouge third grade class lacks access to playground equipment.

The class is attending school in a temporary building while their elementary school undergoes a two-year renovation.

The temporary site has some grass and a cement slab where kids can play, but no playground equipment, Jackson said. And parents needed to set up an Amazon wish list to purchase basic equipment such as balls, jump ropes and chalk for students to use. The district told parents there would be no playground equipment due to a lack of funds, then promised to install equipment, Jackson said, but months later, there is none.

Cement surface surrounded by a fence with grass beyond. There's no playground equipment..
The temporary site where Fairleigh Jackson’s daughter goes to school in East Baton Rouge Parish lacks playground equipment. Fairleigh Jackson, CC BY-ND

Jackson said it’s hard to complain when other schools in the district don’t even have needed security measures in place. “When I think about playground equipment, I think that’s a necessary piece of child development,” Jackson said. “Do we even advocate for something that should be a daily part of our kids’ experience when kids’ safety isn’t being funded?”

Meanwhile, the challenges facing administrators 500-odd miles away at Atlanta Public Schools are nothing if not formidable: The district is dealing with chronic absenteeism among half of its Black students, many students are experiencing homelessness, and it’s facing a teacher shortage.

At the same time, Atlanta is showering corporations with tax breaks. The city has two bodies that dole them out: the Development Authority of Fulton County, or DAFC, and Invest Atlanta, the city’s economic development agency. The deals handed out by the two agencies have drained $103.8 million from schools from fiscal 2017 to 2022, according to Atlanta school system financial statements.

What exactly Atlanta and other cities and states are accomplishing with tax abatement programs is hard to discern. Fewer than a quarter of companies that receive breaks in the U.S. needed an incentive to invest, according to a 2018 study by the Upjohn Institute for Employment Research, a nonprofit research organization.

This means that at least 75% of companies received tax abatements when they’re not needed – with communities paying a heavy price for economic development that sometimes provides little benefit.

In Kansas City, for example, there’s no guarantee that the businesses that do set up shop after receiving a tax abatement will remain there long term. That’s significant considering the historic border war between the Missouri and Kansas sides of Kansas City – a competition to be the most generous to the businesses, said Jason Roberts, president of the Kansas City Federation of Teachers and School-Related Personnel. Kansas City, Missouri, has a 1% income tax on people who work in the city, so it competes for as many workers as possible to secure that earnings tax, Roberts said.

Under city and state tax abatement programs, companies that used to be in Kansas City have since relocated. The AMC Theaters headquarters, for example, moved from the city’s downtown to Leawood, Kansas, about a decade ago, garnering some $40 million in Promoting Employment Across Kansas tax incentives.

Roberts said that when one side’s financial largesse runs out, companies often move across the state line – until both states decided in 2019 that enough was enough and declared a cease-fire.

But tax breaks for other businesses continue. “Our mission is to grow the economy of Kansas City, and application of tools such as tax exemptions are vital to achieving that mission, said Jon Stephens, president and CEO of Port KC, the Kansas City Port Authority. The incentives speed development, and providing them "has resulted in growth choosing KC versus other markets,” he added.

In Atlanta, those tax breaks are not going to projects in neighborhoods that need help attracting development. They have largely been handed out to projects that are in high demand areas of the city, said Julian Bene, who served on Invest Atlanta’s board from 2010 to 2018. In 2019, for instance, the Fulton County development authority approved a 10-year, $16 million tax abatement for a 410-foot-tall, 27,000-square-foot tower in Atlanta’s vibrant Midtown business district. The project included hotel space, retail space and office space that is now occupied by Google and Invesco.

In 2021, a developer in Atlanta pulled its request for an $8 million tax break to expand its new massive, mixed-use Ponce City Market development in the trendy Beltline neighborhood with an office tower and apartment building. Because of community pushback, the developer knew it likely did not have enough votes from the commission for approval, Bene said. After a second try for $5 million in lower taxes was also rejected, the developer went ahead and built the project anyway.

Invest Atlanta has also turned down projects in the past, Bene said. Oftentimes, after getting rejected, the developer goes back to the landowner and asks for a better price to buy the property to make their numbers work, because it was overvalued at the start.

Trouble in Philadelphia

On Thursday, Oct. 26, 2023, an environmental team was preparing Southwark School in Philadelphia for the winter cold. While checking an attic fan, members of the team saw loose dust on top of flooring that contained asbestos. The dust that certainly was blowing into the floors below could contain the cancer-causing agent. Within a day, Southwark was closed – the seventh Philadelphia school temporarily shuttered since the previous academic year because of possible asbestos contamination.

A 2019 inspection of the John L Kinsey school in Philadelphia found asbestos in plaster walls, floor tiles, radiator insulation and electrical panels. Asbestos is a major problem for Philadelphia’s public schools. The district needs $430 million to clean up the asbestos, lead, and other environmental hazards that place the health of students, teachers and staff at risk. And that is on top of an additional $2.4 billion to fix failing and damaged buildings.

Yet the money is not available. Matthew Stem, a former district official, testified in a 2023 lawsuit about financing of Pennsylvania schools that the environmental health risks cannot be addressed until an emergency like at Southwark because “existing funding sources are not sufficient to remediate those types of issues.”

Meanwhile, the city keeps doling out abatements, draining money that could have gone toward making Philadelphia schools safer. In the fiscal year ending June 2022, such tax breaks cost the school district $118 million – more than 25% of the total amount needed to remove the asbestos and other health dangers. These abatements take 31 years to break even, according to the city’s own scenario impact analyses.

Huge subsets of the community – primarily Black, Brown, poor or a combination – are being “drastically impacted” by the exemptions and funding shortfalls for the school district, said Kendra Brooks, a Philadelphia City Council member. Schools and students are affected by mold, asbestos and lead, and crumbling infrastructure, as well as teacher and staffing shortages – including support staff, social workers and psychologists.

More than half the district’s schools that lacked adequate air conditioning – 87 schools – had to go to half days during the first week of the 2023 school year because of extreme heat. Poor heating systems also leave the schools cold in the winter. And some schools are overcrowded, resulting in large class sizes, she said.

Front of a four-story brick school building with tall windows, some with air-conditioners
Horace Furness High School in Philadelphia, where hot summers have temporarily closed schools that lack air conditioning. Nick-philly/Wikimedia, CC BY-SA

Teachers and researchers agree that a lack of adequate funding undermines educational opportunities and outcomes. That’s especially true for children living in poverty. A 2016 study found that a 10% increase in per-pupil spending each year for all 12 years of public schooling results in nearly one-third of a year of more education, 7.7% higher wages and a 3.2% reduction in annual incidence of adult poverty. The study estimated that a 21.7% increase could eliminate the high school graduation gap faced by children from low-income families.

More money for schools leads to more education resources for students and their teachers. The same researchers found that spending increases were associated with reductions in student-to-teacher ratios, increases in teacher salaries and longer school years. Other studies yielded similar results: School funding matters, especially for children already suffering the harms of poverty.

While tax abatements themselves are generally linked to rising property values, the benefits are not evenly distributed. In fact, any expansion of the tax base due to new property construction tends to be outside of the county granting the tax abatement. For families in school districts with the lost tax revenues, their neighbors’ good fortune likely comes as little solace. Meanwhile, a poorly funded education system is less likely to yield a skilled and competitive workforce, creating longer-term economic costs that make the region less attractive for businesses and residents.

“There’s a head-on collision here between private gain and the future quality of America’s workforce,” said Greg LeRoy, executive director at Good Jobs First, a Washington, D.C., advocacy group that’s critical of tax abatement and tracks the use of economic development subsidies.

Three-story school building with police officers out front and traffic lights in the foreground
Roxborough High School in Philadelphia. AP Photo/Matt Rourke

As funding dwindles and educational quality declines, additional families with means often opt for alternative educational avenues such as private schooling, home-schooling or moving to a different school district, further weakening the public school system.

Throughout the U.S., parents with the power to do so demand special arrangements, such as selective schools or high-track enclaves that hire experienced, fully prepared teachers. If demands aren’t met, they leave the district’s public schools for private schools or for the suburbs. Some parents even organize to splinter their more advantaged, and generally whiter, neighborhoods away from the larger urban school districts.

Those parental demands – known among scholars as “opportunity hoarding” – may seem unreasonable from the outside, but scarcity breeds very real fears about educational harms inflicted on one’s own children. Regardless of who’s to blame, the children who bear the heaviest burden of the nation’s concentrated poverty and racialized poverty again lose out.

Rethinking in Philadelphia and Riverhead

Americans also ask public schools to accomplish Herculean tasks that go far beyond the education basics, as many parents discovered at the onset of the pandemic when schools closed and their support for families largely disappeared.

A school serving students who endure housing and food insecurity must dedicate resources toward children’s basic needs and trauma. But districts serving more low-income students spend less per student on average, and almost half the states have regressive funding structures.

Facing dwindling resources for schools, several cities have begun to rethink their tax exemption programs.

The Philadelphia City Council recently passed a scale-back on a 10-year property tax abatement by decreasing the percentage of the subsidy over that time. But even with that change, millions will be lost to tax exemptions that could instead be invested in cash-depleted schools. “We could make major changes in our schools’ infrastructure, curriculum, staffing, staffing ratios, support staff, social workers, school psychologists – take your pick,” Brooks said.

Other cities looking to reform tax abatement programs are taking a different approach. In Riverhead, New York, on Long Island, developers or project owners can be granted exemptions on their property tax and allowed instead to shell out a far smaller “payment in lieu of taxes,” or PILOT. When the abatement ends, most commonly after 10 years, the businesses then will pay full property taxes.

At least, that’s the idea, but the system is far from perfect. Beneficiaries of the PILOT program have failed to pay on time, leaving the school board struggling to fill a budget hole. Also, the payments are not equal to the amount they would receive for property taxes, with millions of dollars in potential revenue over a decade being cut to as little as a few hundred thousand. On the back end, if a business that’s subsidized with tax breaks fails after 10 years, the projected benefits never emerge.

And when the time came to start paying taxes, developers have returned to the city’s Industrial Development Agency with hat in hand, asking for more tax breaks. A local for-profit aquarium, for example, was granted a 10-year PILOT program break by Riverhead in 1999; it has received so many extensions that it is not scheduled to start paying full taxes until 2031 – 22 years after originally planned.

Kansas City border politics

Like many cities, Kansas City has a long history of segregation, white flight and racial redlining, said Kathleen Pointer, senior policy strategist for Kansas City Public Schools.

James Elementary in Kansas City, Mo. Danielle McLean, CC BY-ND

Troost Avenue, where the Kansas City Public Schools administrative office is located, serves as the city’s historic racial dividing line, with wealthier white families living in the west and more economically disadvantaged people of color in the east. Most of the district’s schools are located east of Troost, not west.

Students on the west side “pretty much automatically funnel into the college preparatory middle school and high schools,” said The Federation of Teachers’ Roberts. Those schools are considered signature schools that are selective and are better taken care of than the typical neighborhood schools, he added.

The school district’s tax levy was set by voters in 1969 at 3.75%. But successive attempts over the next few decades to increase the levy at the ballot box failed. During a decadeslong desegregation lawsuit that was eventually resolved through a settlement agreement in the 1990s, a court raised the district’s levy rate to 4.96% without voter approval. The levy has remained at the same 4.96% rate since.

Meanwhile, Kansas City is still distributing 20-year tax abatements to companies and developers for projects. The district calculated that about 92% of the money that was abated within the school district’s boundaries was for projects within the whiter west side of the city, Pointer said.

“Unfortunately, we can’t pick or choose where developers build,” said Meredith Hoenes, director of communications for Port KC. “We aren’t planning and zoning. Developers typically have plans in place when they knock on our door.”

In Kansas City, several agencies administer tax incentives, allowing developers to shop around to different bodies to receive one. Pointer said he believes the Port Authority is popular because they don’t do a third-party financial analysis to prove that the developers need the amount that they say they do.

With 20-year abatements, a child will start pre-K and graduate high school before seeing the benefits of a property being fully on the tax rolls, Pointer said. Developers, meanwhile, routinely threaten to build somewhere else if they don’t get the incentive, she said.

In 2020, BlueScope Construction, a company that had received tax incentives for nearly 20 years and was about to roll off its abatement, asked for another 13 years and threatened to move to another state if it didn’t get it. At the time, the U.S. was grappling with a racial reckoning following the murder of George Floyd, who was killed by a Minneapolis police officer.

“That was a moment for Kansas City Public Schools where we really drew a line in the sand and talked about incentives as an equity issue,” Pointer said.

After the district raised the issue – tying the incentives to systemic racism – the City Council rejected BlueScope’s bid and, three years later, it’s still in Kansas City, fully on the tax rolls, she said. BlueScope did not return multiple requests for comment.

Recently, a multifamily housing project was approved for a 20-year tax abatement by the Port Authority of Kansas City at Country Club Plaza, an outdoor shopping center in an affluent part of the city. The housing project included no affordable units. “This project was approved without any independent financial analysis proving that it needed that subsidy,” Pointer said.

All told, the Kansas City Public Schools district faces several shortfalls beyond the $400 million in deferred maintenance, Superintendent Jennifer Collier said. There are staffing shortages at all positions: teachers, paraprofessionals and support staff. As in much of the U.S., the cost of housing is surging. New developments that are being built do not include affordable housing, or when they do, the units are still out of reach for teachers.

That’s making it harder for a district that already loses about 1 in 5 of its teachers each year to keep or recruit new ones, who earn an average of only $46,150 their first year on the job, Collier said.

East Baton Rouge and the industrial corridor

It’s impossible to miss the tanks, towers, pipes and industrial structures that incongruously line Baton Rouge’s Scenic Highway landscape. They’re part of Exxon Mobil Corp.’s campus, home of the oil giant’s refinery in addition to chemical and plastics plants.

Aerial view of industrial buildings along a river
Exxon Mobil Corp.’s Baton Rouge campus occupies 3.28 square miles. AP Photo/Gerald Herbert

Sitting along the Mississippi River, the campus has been a staple of Louisiana’s capital for over 100 years. It’s where 6,000 employees and contractors who collectively earn over $400 million annually produce 522,000 barrels of crude oil per day when at full capacity, as well as the annual production and manufacture of 3 billion pounds of high-density polyethylene and polypropylene and 6.6 billion pounds of petrochemical products. The company posted a record-breaking $55.7 billion in profits in 2022 and $36 billion in 2023.

Across the street are empty fields and roads leading into neighborhoods that have been designated by the U.S. Department of Agriculture as a low-income food desert. A mile drive down the street to Route 67 is a Dollar General, fast-food restaurants, and tiny, rundown food stores. A Hi Nabor Supermarket is 4 miles away.

East Baton Rouge Parish’s McKinley High School, a 12-minute drive from the refinery, serves a student body that is about 80% Black and 85% poor. The school, which boasts famous alums such as rapper Kevin Gates, former NBA player Tyrus Thomas and Presidential Medal of Freedom recipient Gardner C. Taylor, holds a special place in the community, but it has been beset by violence and tragedy lately. Its football team quarterback, who was killed days before graduation in 2017, was among at least four of McKinley’s students who have been shot or murdered over the past six years.

The experience is starkly different at some of the district’s more advantaged schools, including its magnet programs open to high-performing students.

Black-and-white outline of Louisiana showing the parishes, with one, near the bottom right, filled in red
East Baton Rouge Parish, marked in red, includes an Exxon Mobil Corp. campus and the city of Baton Rouge. David Benbennick/Wikimedia

Baton Rouge is a tale of two cities, with some of the worst outcomes in the state for education, income and mortality, and some of the best outcomes. “It was only separated by sometimes a few blocks,” said Edgar Cage, the lead organizer for the advocacy group Together Baton Rouge. Cage, who grew up in the city when it was segregated by Jim Crow laws, said the root cause of that disparity was racism.

“Underserved kids don’t have a path forward” in East Baton Rouge public schools, Cage said.

A 2019 report from the Urban League of Louisiana found that economically disadvantaged African American and Hispanic students are not provided equitable access to high-quality education opportunities. That has contributed to those students underperforming on standardized state assessments, such as the LEAP exam, being unprepared to advance to higher grades and being excluded from high-quality curricula and instruction, as well as the highest-performing schools and magnet schools.

“Baton Rouge is home to some of the highest performing schools in the state,” according to the report. “Yet the highest performing schools and schools that have selective admissions policies often exclude disadvantaged students and African American and Hispanic students.”

Dawn Collins, who served on the district’s school board from 2016 to 2022, said that with more funding, the district could provide more targeted interventions for students who were struggling academically or additional support to staff so they can better assist students with greater needs.

But for decades, Louisiana’s Industrial Ad Valorem Tax Exemption Program, or ITEP, allowed for 100% property tax exemptions for industrial manufacturing facilities, said Erin Hansen, the statewide policy analyst at Together Louisiana, a network of 250 religious and civic organizations across the state that advocates for grassroots issues, including tax fairness.

The ITEP program was created in the 1930s through a state constitutional amendment, allowing companies to bypass a public vote and get approval for the exemption through the governor-appointed Board of Commerce and Industry, Hansen said. For over 80 years, that board approved nearly all applications that it received, she said.

Since 2000, Louisiana has granted a total of $35 billion in corporate property tax breaks for 12,590 projects.

Louisiana’s executive order

A few efforts to reform the program over the years have largely failed. But in 2016, Gov. John Bel Edwards signed an executive order that slightly but importantly tweaked the system. On top of the state board vote, the order gave local taxing bodies – such as school boards, sheriffs and parish or city councils – the ability to vote on their own individual portions of the tax exemptions. And in 2019 the East Baton Rouge Parish School Board exercised its power to vote down an abatement.

Throughout the U.S., school boards’ power over the tax abatements that affect their budgets vary, and in some states, including Georgia, Kansas, Nevada, New Jersey and South Carolina, school boards lack any formal ability to vote or comment on tax abatement deals that affect them.

Edwards’ executive order also capped the maximum exemption at 80% and tightened the rules so routine capital investments and maintenance were no longer eligible, Hansen said. A requirement concerning job creation was also put in place.

Concerned residents and activists, led by Together Louisiana and sister group Together Baton Rouge, rallied around the new rules and pushed back against the billion-dollar corporation taking more tax money from the schools. In 2019, the campaign worked: the school board rejected a $2.9 million property tax break bid by Exxon Mobil.

After the decision, Exxon Mobil reportedly described the city as “unpredictable.”

However, members of the business community have continued to lobby for the tax breaks, and they have pushed back against further rejections. In fact, according to Hansen, loopholes were created during the rulemaking process around the governor’s executive order that allowed companies to weaken its effectiveness.

In total, 223 Exxon Mobil projects worth nearly $580 million in tax abatements have been granted in the state of Louisiana under the ITEP program since 2000.

“ITEP is needed to compete with other states – and, in ExxonMobil’s case, other countries,” according to Exxon Mobil spokesperson Lauren Kight.

She pointed out that Exxon Mobil is the largest property taxpayer for the EBR school system, paying more than $46 million in property taxes in EBR parish in 2022 and another $34 million in sales taxes.

A new ITEP contract won’t decrease this existing tax revenue, Kight added. “Losing out on future projects absolutely will.”

The East Baton Rouge Parish School Board has continued to approve Exxon Mobil abatements, passing $46.9 million between 2020 and 2022. Between 2017 and 2023, the school district has lost $96.3 million.

Taxes are highest when industrial buildings are first built. Industrial property comes onto the tax rolls at 40% to 50% of its original value in Louisiana after the initial 10-year exemption, according to the Ascension Economic Development Corp.

Exxon Mobil received its latest tax exemption, $8.6 million over 10 years – an 80% break – in October 2023 for $250 million to install facilities at the Baton Rouge complex that purify isopropyl alcohol for microchip production and that create a new advanced recycling facility, allowing the company to address plastic waste. The project created zero new jobs.

The school board approved it by a 7-2 vote after a long and occasionally contentious board meeting.

“Does it make sense for Louisiana and other economically disadvantaged states to kind of compete with each other by providing tax incentives to mega corporations like Exxon Mobil?” said EBR School Board Vice President Patrick Martin, who voted for the abatement. “Probably, in a macro sense, it does not make a lot of sense. But it is the program that we have.”

Obviously, Exxon Mobil benefits, he said. “The company gets a benefit in reducing the property taxes that they would otherwise pay on their industrial activity that adds value to that property.” But the community benefits from the 20% of the property taxes that are not exempted, he said.

“I believe if we don’t pass it, over time the investments will not come and our district as a whole will have less money,” he added.

In 2022, a year when Exxon Mobil made a record $55.7 billion, the company asked for a 10-year, 80% property tax break from the cash-starved East Baton Rouge Parish school district. A lively debate ensued.

Meanwhile, the district’s budgetary woes are coming to a head. Bus drivers staged a sickout at the start of the school year, refusing to pick up students – in protest of low pay and not having buses equipped with air conditioning amid a heat wave. The district was forced to release students early, leaving kids stranded without a ride to school, before it acquiesced and provided the drivers and other staff one-time stipends and purchased new buses with air conditioning.

The district also agreed to reestablish transfer points as a temporary response to the shortages. But that transfer-point plan has historically resulted in students riding on the bus for hours and occasionally missing breakfast when the bus arrives late, according to Angela Reams-Brown, president of the East Baton Rouge Federation of Teachers. The district plans to purchase or lease over 160 buses and solve its bus driver shortage next year, but the plan could lead to a budget crisis.

A teacher shortage looms as well, because the district is paying teachers below the regional average. At the school board meeting, Laverne Simoneaux, an ELL specialist at East Baton Rouge’s Woodlawn Elementary, said she was informed that her job was not guaranteed next year since she’s being paid through federal COVID-19 relief funds. By receiving tax exemptions, Exxon Mobil was taking money from her salary to deepen their pockets, she said.

A young student in the district told the school board that the money could provide better internet access or be used to hire someone to pick up the glass and barbed wire in the playground. But at least they have a playground – Hayden Crockett, a seventh grader at Sherwood Middle Academic Magnet School, noted that his sister’s elementary school lacked one.

“If it wasn’t in the budget to fund playground equipment, how can it also be in the budget to give one of the most powerful corporations in the world a tax break?” Crockett said. “The math just ain’t mathing.”

Christine Wen worked for the nonprofit organization Good Jobs First from June 2019 to May 2022 where she helped collect tax abatement data.

Nathan Jensen has received funding from the John and Laura Arnold Foundation, the Smith Richardson Foundation, the Ewing Marion Kauffman Foundation and the Washington Center for Equitable Growth. He is a Senior Fellow at the Niskanen Center.

Danielle McLean and Kevin Welner do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.

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