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Macleod: The Great Global Unwind Begins, Part 2

Macleod: The Great Global Unwind Begins, Part 2

Authored by Alasdair Macleod via GoldMoney.com,

With price inflation rising out of control…

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Macleod: The Great Global Unwind Begins, Part 2

Authored by Alasdair Macleod via GoldMoney.com,

With price inflation rising out of control and interest rates rising strongly, the trading environment for commercial banks has fundamentally changed. With bad debts looming and bond prices in entrenched downtrends, procrastination is now the enemy of bankers.

We are at the beginning of The Great Unwind, and this article elaborates on my first article for Goldmoney on the subject published here

The imperative for bankers to respond to these conditions overrides all other matters if their businesses are to survive these changed conditions. We are entering a cyclical downdraft of the bank credit cycle which promises to be cataclysmic. And the monetary policy planners at the central banks can do nothing to stop it.

After outlining the scale of the problems faced by each global systemically important bank, this article looks at the future for the $600 trillion derivatives mountain.

It was born out of the long-term decline in interest rates from the mid-eighties, which ended last year. It is almost entirely distributed through banks and shadow banks.

The question to address is, what is the future for the derivative mountain, now that the long-term trend for falling interest rates is over? And what are the economic consequences?

If it’s you in the hot seat…

Imagine, for a moment, that you are the CEO of a commercial bank involved in lending to businesses and with profit centres acting in a range of financial activities. As CEO, you are answerable to the board of directors for the bank’s performance, and ultimately the bank’s shareholders for maintaining and advancing the value of their shares. 

Furthermore, let us set this imaginary exercise in the present. These are the issues that should keep you awake at night:

  • In common with your competitors, the ratio of your balance sheet assets to total equity is almost the highest in the history of the bank, in many cases for other banks over twenty times leaveraged.

  • Official inflation, measured by the CPI is about ten per cent, and producer prices are rising somewhat faster. Your central bank expects a return to the 2% target in two- or three-years’ time. But your contacts at the central bank have privately admitted to you that they cannot imagine the circumstances where this would be true without a deep recession.

  • Bond yields are rising, and losses are beginning to impact on the bank’s investments. The bank has relatively little direct exposure to corporate bonds and equities, but they are commonly held as collateral against customer loans.

  • How are higher interest rates impacting the quality of the bank’s loan book? The bank supported its business customers through the covid pandemic, which increased the indebtedness of them all. This exposes the bank to excessive default risk if rates rise further.

  • The mortgage loan book has been a profitable business for decades. But the bank is beginning to see a material rise in delinquencies. If loan guarantees are not forthcoming from government agencies, the bank may have to shut this activity down.

  • What impact will higher interest rates have on the bank’s derivative exposure? What are the counterparty risks in derivative chains? Derivatives that involve inadequately capitalised counterparties should perhaps be sold on, or where the bank has the option to do so, closed down.

The underlying problem is that the conditions that led to the bank becoming increasingly involved in diversified activities, such as investment banking, trading, and investment management have now changed. Since financial deregulation in the 1980s, the bank has expanded into these profitable areas. The whole industry moved from dealing in credit into generating fee income. The growth in fee income can be directly related to the long-term trend of falling interest rates, which apart from interruptions such as the dot-com excesses and the Lehman crisis, stimulated growth in corporate finance, underwriting, investment management, and trading in financial securities. The expansion of these activities in turn led to a massive expansion of derivative markets, with new instruments being devised, such as credit default and interest rate swaps.

If, and this is really what should worry you, the long-term trend of falling global interest rates has ended and is now set to be reversed, not just temporarily but for the rest of the decade and perhaps beyond, then the reasons justifying the bank’s expansion away from its core lending business have come to an end. As CEO, how do you unwind the deep-rooted departmental interests, and keep the shareholders onside?

It is time for the whole executive to be urgently involved in a wide-ranging debate about how serious these threats might be and where you should take actions to protect the bank’s shareholders’ interests. Given the high level of balance sheet leverage, the bank’s survival is at stake if you act indecisively or too slowly. You are facing head-on the unpleasant prospect of The Great Unwind.

Balance sheet ratios

There are two ratios that concern bankers. The first is the relationship between liquid and illiquid assets with respect to sources of balance sheet funding. These are set by regulators through Basel regulations, now in their third iteration. Banks are required to submit details of their balance sheets periodically to bank regulators in accordance with the net stable funding requirement formula as set out in Basel III.

The second ratio is of less importance to regulators, which is the relationship between Tier 1 capital and the total balance sheet, which Basel regulations simply states that the maximum leverage ratio is for Tier 1 capital to not be less than 3% of the bank’s balance sheet assets. Put another way, subject to certain conditions, a bank can theoretically leverage its assets to equity as much as thirty-three times. But it should be noted that within that leverage ratio, a bank is permitted to net off certain classifications of credit, reducing its apparent balance sheet size. The following are examples of hidden forms of balance sheet assets and liabilities:

  • Security financing transactions, which include repos and other derivatives, can be netted off where they are between the same counterparty and maturity. For a true accounting picture, a bank balance sheet should reflect credit and debt obligations on both sides of its balance sheet until they are extinguished.

  • Long and short credit derivatives can be netted so long as there is no maturity mismatch. Again, the full obligations should be reflected on both sides of the balance sheet. And valuation methods give banks enormous wriggle room, an issue which regulators are unable to properly address.

  • Off-balance sheet items are only partially recognised through standardised credit conversion factors. Where a bank has off-balance sheet activities, they should be properly reflected in its accounts.

Therefore, true bank balance sheet leverage can be considerably greater than a bank complying with Basel regulations will declare in its audited accounts. But while conforming with Basel regulations, the board of a bank has a primary duty, often forgotten even by some directors, to their shareholders.

It is changes in the ratio between a bank’s assets and its shareholders’ equity which drive the cycle of bank credit expansion and contraction, which in turn drives the business cycle. 

While they have a specific expertise in assessing lending risk, bankers are human. When they perceive lending risk to decline, they increase the quantity of credit offered, recorded as assets on their bank balance sheets, without increasing shareholders’ equity. Their confidence is synchronised through individual banks’ market intelligence and commonly available information concerning lending conditions. What few bankers realise is that it is expansion of their cohort lending which creates the very confidence in the lending conditions being observed. 

The benefit to the bank is enhanced by expanding the ratio of total balance sheet assets to shareholders’ equity. A gross lending margin of two per cent becomes 20% for the shareholders on a balance sheet ten-times leveraged. However, this depends on margins being maintained, which, when banks compete with each other for lending business, is unlikely. Furthermore, the trend for declining rates over the decades due to the policies of the monetary authorities has led to a general increase in shareholder leverage as banking cohorts try to maintain profitability on slimming margins.

We all know that this recently reached an extreme position, with unnaturally negative interest rates imposed by central banks principally in Japan, the Eurozone, and Switzerland. In response to heavily compressed rate margins, the large commercial banks in the Eurozone were leveraging up through repos to gear up the slimmest of lending margins. The European repo market has been rolling over in excess of €9 trillion in all currencies with euros the largest component by far. 

For these reasons, the most highly leveraged G-SIBs (global systemically important banks) are in the Eurozone and Japan. Table 1 below shows their balance sheet leverage from highest to lowest (the third column), and the price to book rating upon which the market values this leverage risk. Share prices were as of last weekend.

With the Eurozone’s and Japan’s G-SIBs heading the list of most highly leveraged banks, the question before us is now that interest rates are rising, how will these banks adjust their balance sheet ratios to more normal levels, which are probably in the region of eight to ten times or even less? True balance sheet gearing in all cases is likely to be far, far higher principally because of the accounting treatment of derivative obligations. These are the banks leading involvement in repos, have significant derivative positions, have netted out foreign exchange, commodity, and credit derivatives, and have only partially reflected off-balance sheet obligations through standardised credit conversion factors. 

In general terms, in the new interest rate environment banks are almost certain to restrict counterparty risk by reducing their exposure to other banks for two reasons. Firstly, contracting balance sheets throughout the banking industry enhance systemic risk significantly, and a significant number of the banks in Table 1 are highly likely to fail. And secondly, as a cohort bankers are motivated to act the same way for the same reasons at the same time, even for banks without derivative exposure. The contraction and consequences of interbank obligations should not be ignored.

The problems of rising inflation, interest rates, and bond yields

After decades of minimal price inflation, central banks were caught unawares when consumer prices started to rise and continued to do so. Initially, they said it was transient. When they were laughed at, they then merely pushed back their forecasts of consumer price inflation returning to the 2% target back a year. The chart below, of the current UK’s Office for Budget Responsibility forecast is typical. It is due to be updated on 17 November, but it is a racing certainty that the OBS will still expect it to return to 2%, a little further delayed. To admit otherwise is to acknowledge a complete failure of monetary policy.

The US Congressional Budget Office is similarly unrealistically optimistic about the outlook for consumer price inflation. The illustration below is lifted from the CBO’s website.

But with consumer prices already rising in the US, UK, and Europe at a 10% clip and likely to go higher in the coming months, the interest rate disconnection is substantial and can only be bridged with interest rates doubling or even tripling from current levels. Even if they only double, business plans for all manufacturers and service providers will go out of the window. And with that catastrophe, bad debts for the banks will simply soar.

The effect on financial securities will be no less devastating. While banks generally limit their bond exposure to shorter maturities — typically bills and bonds maturing in less than a year — it is likely that banks in the Eurozone and Japan will have some exposure to longer maturities. They might have some exposure to corporate bonds and collateralised debt obligations as well, which will be at risk from rising interest rates. This is not to be ignored, and the evidence of a downturn in credit availability for corporates is already evident in loan officer surveys. Our next chart, of US banking sentiment towards corporate borrowers confirms that credit contraction for non-financial borrowers is already underway.

Clearly, bank credit is set to contract mightily, and together with higher interest rates it is likely to lead to escalating non-performing loans, insolvencies, and rising unemployment. These conditions are likely to develop before interest rates can properly reflect the debasement of the major currencies, reflected in the rise in consumer prices.

Economists commonly assume that the developing recession will restrict consumer demand, leading to an amelioration of the consumer price inflation problem. Furthermore, some supply chains are beginning to flow again, particularly with respect to computer chips. But before we can consider how a fall in demand affects prices, we should remember that the initial market effect of contracting bank credit is always to drive interest rates higher, due to accelerating credit demand arising from lost sales and accumulating inventories while banks are trying to reduce their credit obligations. 

Since almost all recorded transactions that make up GDP are settled with bank credit, its contraction will reduce GDP as well. The extent to which this is the case cannot be mechanically predicted. However, since bank balance sheets are very highly leveraged and rising interest rates will force a severe credit contraction, the effect will not be trivial. If a banker is to retain control over non-performing write-offs, he must not delay in reducing his exposure.

It is for this reason that the cycle of bank credit is like a saw-tooth series of gradual increases followed by sharp declines. And the more exaggerated the increase, the more catastrophic the decline.

Mortgage loan books

It turns out that the sub-prime mortgage crisis of 2007-2009 was little more than a blip in the growth of bank lending for residential property ownership. But America with Fanny Mae and Freddy Mac is different from other jurisdictions, where banks have become highly active originators in the mortgage business.

With old memories of ruinous interest rates, borrowers have consistently gone for fixed rate mortgages in preference to floating rates. Some 80% of residential mortgages in the UK are fixed rate for between two and five years before they are reset. Until recently, to opt for fixed rates was the wrong decision. Banks have profited mightily, not by simply lending long and borrowing short, but by covering fixed rate offers with interest rate swaps allowing a healthy turn for the bank, with early termination expenses covered by penalties for the borrower.

For a bank, the beauty of this business lies in the transaction size and minimal administration. And with house prices continually rising, the collateral has been secure. But this has now changed dramatically, with mortgage rates soaring and house prices turning lower. The previous lucky minority who opted for floating rates find they face an enhanced risk of repossession of their homes. And interest rates have probably only started to increase.

From a banker’s point of view, this is turning into a very bad business. Payment defaults are certain to increase rapidly; not just for those on floating rates, but with the majority of borrowers on two- and three- fixed rate deals which are maturing at a rapid rate. A two-year fixed rate of less than two per cent faces renewal at over three times that. And no banker wants the bad publicity of foreclosing on homeowners and their families in droves, “who through no fault of their own” face eviction.

In any event, when homeowners in large numbers face eviction, the lenders have the problem more than the homeowners. It is both politically and practicably impossible for lenders to evict families in large numbers and put their homes up for sale. Apart from anything else, residential property values would collapse under the combined weight of higher borrowing costs (if mortgages are still available) and an increasing supply of liquidated housing stocks. Look no further than what happened to property prices in cities like Atlanta in 2007-2010, as the liar-loans were unwound. All that happens from the bank’s point of view is that even solvent borrowers would be pushed deeply into negative equity.

The difficulties in managing these politically toxic issues will not be the only problem facing bankers. Existing fixed-rate mortgages have been covered through credit default swaps, which are only as good as a bank’s counterparties. If, say, a British bank has a highly leveraged Eurozone bank as its counterparty, it will soon be thinking about counterparty risk in a more focused way. Where it can, it should seek to novate these obligations with more secure counterparties. But that comes with costs.

In a rising interest rate environment, this easy-come business will not be easy-go.

Wider derivative considerations

According to the Bank for International Settlements, OTC derivative market interests in the global banking system amounted to $600 trillion equivalent of notional amounts outstanding last December.[i] Being based on only seventy dealers in twelve countries reporting to their respective central banks, the statistics are not the whole picture, capturing an estimated 94% on average of their wider triannual survey covering an additional thirty nations.

To this can be added a further $40 trillion in regulated futures and options markets, in which banks play a major counterparty role. To give an idea of the sheer scale of these activities, global GDP is estimated at roughly $100 trillion.

The credit nature of OTC derivatives is poorly understood, and therefore widely ignored by commentators. Nevertheless, these are credit obligations which are only extinguished after the terms of the individual derivative contracts have been satisfied. But being purely financial, they differ from a contract which has on one side the delivery of goods or a service, and on the other a settlement invariably in bank credit. A financial transaction, be it a forward settlement, a swap, or an option exercise, involves both debt and credit obligations. And since debt is synonymous with credit because one always balances the other in both parties’ books, until a financial obligation is settled there is twice the notional credit involved. 

The simplest example to take is deferred settlements, such as foreign exchange forwards. In these cases, there are two parts to the contract: there is the initial agreement, under whose terms there may or may not be a partial margin payment due immediately, and the second part is satisfaction of the entire contract by its completion.

At a notional $104 trillion — the BIS’s figure for mid-2021— foreign exchange contracts are the second largest segment of the $600 trillion OTC total. Ten per cent of that $104 trillion are options. According to the BIS’s triannual survey, only 84% of foreign exchange contracts are captured in the semi-annual statistics, so a truer figure is $124 trillion.

By maturity, they split 80% up to a year, 15% one to five years, and the rest over five years. Therefore, these are not a simple case of next day settlement, but credit obligations of material duration.

The status of options is different from forward settlements, being initial settlements for a transaction that might not eventually take place. The buyer of the option has no further credit obligation other than the initial payment of a premium to the seller of the option. But the latter party does have a continuing credit obligation which is not in his power to extinguish before it finally matures. Because all foreign exchange contracts on the BIS’s statistics represent only one side of foreign exchange contracts, the whole amount of $124 trillion are definitely credit, the majority of which, only excluding options, is duplicated by matching credit obligations for the other counterparties. Therefore, total foreign exchange derivative credit in trillions is double notional amounts outstanding less one side of notional options. This amounts to $236 trillion.

According to the BIS, the gross market value of this credit is $2.548 trillion. The BIS defines gross market value as “the sum of the absolute values of all outstanding derivatives contracts with either positive or negative replacement values evaluated at market prices prevailing on the settlement date”. In other words, to the extent to which the banking system is counterparty to these OTC derivatives, in total their balance sheets will reflect this figure, and not actual credit obligations, which are almost a hundred times greater.

It is in this context that counterparty risk must be considered. Counterparty risk is a wager that delivery of a credit obligation might not occur, and the relevant figure with respect to foreign exchange commitments alone for assessing it is $236 trillion. As an indication of the scale of these credit obligations, the BIS reports that the total of global bank credit to the non-financial sector amounted to $226.3 trillion at the date of its latest derivative statistics, similar to the scale of foreign exchange derivative credit on its own.[ii]

In round figure terms, all other OTC derivatives in the BIS statistics total about five times the recorded foreign exchange total. They include in the BIS’s notional amounts:

  • Interest rate contracts — $475.2 trillion

  • Equity-linked contracts —$7.28 trillion

  • Commodity contract — $2.22 trillion

  • Credit derivatives — $9.06 trillion

  • Credit default swaps — $8.80 trillion

  • Not otherwise classified — $337 billion.

Interest rate derivatives in rising rates

Interest rate derivatives make up the vast bulk of all OTC derivatives, with the notional contract amount of interest rate swaps totalling $397.11 trillion, and forward rate agreements adding a further $39.44 trillion. A swap is a financial derivative in which two parties agree to exchange payment streams based on a specified notional amount for a specified period. And a forward rate agreement is a contract in which the rate to be paid or received on a specific obligation is for a set period of time, beginning at some time in the future.

What concerns us here are the consequences of a rising trend of interest rates for the values of these contracts. FRAs might continue thrive if interest rate relationships along yield curves permit. But an environment of rising counterparty risk might be a hurdle too high for participating banks to overcome. A far more important consideration is the future for interest rate swaps.

Unlike the foreign exchange contracts described above, interest rate swap notional amounts are not bank credit obligations. The credit commitments of both parties are only for the income streams on a notional amount. An originator, usually a bank, funds a fixed interest stream from a floating rate, rather than the other way round.

A clue to the relationship between the gross market value of these contracts and interest rates is illustrated below, which is of interest rate swaps only originated in US dollars.

The chart confirms what we would expect: that major falls in the Fed funds rate stimulate the gross market value of interest rate swaps; and increases in the funds rate correspondingly leads to falls in their gross value. From this, we confirm that declining interest rates lead to profits for banks taking floating rates and offering fixed rates. This is the protection that customers from the gamut of pension funds to homeowners seek from higher rates. While over the long-term interest rates were declining, interest rate swaps were a profitable form of insurance product for the banks to offer. And we can now see that with sharply rising interest rates, not only will these profits vanish, but the banks are bound to exit this market entirely.

This is the heart of The Great Unwind. It will be a surprise to observers to see the BIS’s OTC derivative statistics collapse as interest rates rise further. Existing contracts with time to run can be closed down by buying out counterparties, entering offsetting swaps, selling the swap to another party, or entering an option on offsetting swaps. But these solutions to a bank withdrawing from interest rate swap obligations will be very costly, if available at all, as the entire banking cohort attempts to depart from this market. 

Undoubtedly, large losses will result, threatening the entire global banking network through enhanced systemic risk.

Derivatives and the Bretton Woods III meme

That we are entering an entirely new banking and financial environment was originally put forward by a Credit Suisse analyst, Zoltan Pozsar, earlier this year. Pozsar argued that since the ending of Bretton Woods, a new financial era had dominated financial markets, which he described as Bretton Woods II. He contended that the trend for lower interest rates has now ended, that global supply chains will be repatriated, and that the era of the petrodollar is over. Instead, Bretton Woods III will be the era of commodity-based currencies.

Driving his argument was the imposition of currency sanctions against Russia. In his 3 March article, he posed the question: is the OTC commodity derivatives market the gorilla in the room?[iii] His concern was over margin calls faced by producers and others in the physical commodity business hedging physical product by carrying short positions in the futures markets. As if on cue, Trafigura, the big commodities trader, had to be refinanced within weeks of Pozsar’s note having received massive margin calls on its OTC positions.[iv]

Since Pozsar’s note, Saudi Arabia has signalled the death of the petrodollar by aligning itself with the Russia-China axis, and is scheduled to join the BRICS organisation next year. Members of the Eurasian Economic Union are planning a new trade settlement currency, said to be linked at least partly to commodities. And Moscow is setting up a new gold exchange to handle Russian and other nations’ refined gold, which will almost certainly adopt China’s 99.99% gold kilo standard.

Undoubtedly, the movement towards commodity-linked currencies, the decline of the dollar’s hegemony, and of western financial markets will have a major impact on commercial banking. One wonders how many of the banks weaned on financial activities can make the transition back to traditional lending. And if global supply chains are a thing of the past, will they be prepared to provide the credit for investment in replacement component production in the advanced economies?

As a subset of commodity derivatives, the London Bullion Markets’ forward contracts were estimated to be $781bn on 31 December 2021, of which gold forwards and swaps represented $528bn. At that date, this was the equivalent of 8,975 tonnes compared with 1,595 tonnes in the main gold contract on Comex — a ratio of 5.6 to one

The other side of the LBMA banks’ derivative positions is unallocated customer accounts, originally devised and expanded as a means of diverting demand for gold that would have otherwise driven up the price of bullion. The trend towards increasing quantities of paper bullion relative to the physical is likely to be reversed, because suppression of the gold price is now leading to accelerating demand for physical bullion. 

While Keynesian hedge fund managers claim that higher interest rates are bad for the gold price, rising interest rates are bound to render derivative trading unprofitable for banks which find themselves both short of derivatives, and technically short to their unallocated bullion account holders. As quickly as the London bullion market developed in the 1980s, it is likely to diminish as interest rates increase.

Economic consequences of contracting bank credit

Today, the priority for commercial banks is to reduce their balance sheets to more normal conservative levels in their shareholders’ interests. Without considering secondary factors, the likely consequences of a severe credit contraction for the nominal GDP statistic could be to reduce it by a third or more in major jurisdictions. Realistically, central banks will have no option but to finance the losses of tax revenue and the increased welfare burdens falling on their government’s shoulders. The expansion of central bank currency and credit will replace the contraction of commercial bank credit.

Empirical evidence suggests that a population is more alert to the inflationary implications of central bank credit expanding than that of commercial bank credit. Essentially, if the public deems the currency to be stable, it will respond to higher prices when it is the result of bank credit expansion by moderating their spending. But if the public sees the currency as being unstable, they will vary their spending, and therefore their liquidity reserves accordingly.

Clearly, the political imperative will be to replace lost commercial bank credit with central bank credit. Nor can we rule out “helicopter drops” in an attempt to stimulate recovery. But having tried these measures during the covid pandemic, the public reaction to central bank debasement in a deep recession is almost certain to be less tolerant. 

Central banks, which are already ceding control of interest rates to market forces will find they continue to rise as currencies’ purchasing powers continue to quicken their collapse.

Conclusion

As dealers in credit, banks face the most difficult times in living memory. Austrian economists have long understood that the business cycle is driven by a cycle of bank credit. The root of the credit cycle has been ignored by statist economists and policymakers who respond by suppressing the evidence. This has been going on with increasing intensity since the 1980s, when the Fed under Paul Volcker broke with interest rate suppression to slay the 1970s inflation dragon.

Since then, the era of pre-Bretton Woods price stability has been replaced by the fiat dollar as the reserve currency, with demand for it engineered by Triffin’s dilemma: balancing the export of dollars through budget and trade deficits with global demand for it. The expansion of derivative markets served to conceal the inflationary effects by shifting the supply of dollar credit into financial markets, away from non-financial activities. This lessened the consequences of currency expansion on the prices of goods and services, allowing the monetary authorities to suppress interest rates without apparent ill effects.

That period has now ended, and The Great Unwind of all the distortions accumulated over the last four decades has begun. No one in government and central banking circles saw it coming, and they are still in denial.

Commercial bankers are becoming acutely aware of the dangers to their business models. At the moment, they have only a growing fear of the consequences of interest rates seemingly out of control. Having been protected from free markets by central banks and their regulators, this loss of statist control is immensely worrying for them.

It is now dawning on commercial bankers that they have been left high and dry, with over-leveraged balance sheets, loan business rapidly souring, loan collateral falling in value, and a derivative merry-go-round about to implode. They must stop pandering to regulators and public opinion, and now protect their shareholders from The Great Unwind by dumping credit obligations as rapidly as possible ahead of the wider banking crowd.

From banking deregulation in the mid-eighties, it took nearly four decades to get to this point. The Great Unwind might take only as many months. 

Tyler Durden Fri, 11/04/2022 - 22:20

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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

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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.

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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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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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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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