See Article in the Mill Valley Patch:The "ENRON-ization" of Democracy - Part I
In August of 2001, Sharon Watkins, a vice president at ENRON Corporation, an “innovative energy trading company,” wrote a memo commenting on some unusual accounting practices. By October, as the news hit the press, ENRON’s stock began to dive from its recent highs of $90 per share to below $1 a share, by November 1st.
Its precipitous fall had little to do with the events of 9/11.
The financial world was in shock. How could one of the most valuable companies in the world, with $100 billion in assets, suddenly become worthless: a company whose finances were overseen by one of the country’s most prestigious accounting firms, Arthur Anderson? The answer is complex but at the risk of over-simplifying, their demise was due to something that might be called “off the books” transactions that showed up as “assets” in their balance sheet but were actually liabilities. More accurately, most of those “assets” turned out to be worthless.
What ENRON had been doing is taking all its questionable business deals, failing investments and operations and putting them into so-called “arm’s length” subsidiary entities that were out of the public’s (and apparently their accountant’s) view. Then they were free to magically value them as wildly profitable. They only kept trades and transactions that were actually profitable in the main company, and those turned out to be far and few between (see The Smartest Guys in The Room, by Bethany McLean and Peter Elkind).
At the time, ENRON was the biggest bankruptcy in American history. But as the old saying goes, “You ain’t seen nothin' yet.”
By the fall of 2008, the world’s 14 biggest bankers showed us how it’s really done and almost brought down the global economy in the process. ENRON’s little accounting games were nothing compared to the tens (hundreds?) of trillions of dollars of worthless “assets” that the big banks held on their books: assets with fancy names like collateralized debt obligations (CDOs) and mortgage backed securities (MBS debt), and other more exotic derivatives and financial creations.
These billionaire banksters had succeeded in creating an off the books shadow banking system far larger than the real banking system itself. It’s a crime that you and your children will be paying for, either through inflation, taxes or debt, for the rest of your lives (See The Big Short, by Michael Lewis).
You would think we would wise up. But not to be outdone, your government is now hard at work perfecting this way of doing business in ways ENRON never dreamed of.
The Rise of the JPA
In the early 1920’s a variety of government agencies began to realize that collaboration with other cities or other government or quasi-government agencies allowed them to more efficiently and effectively provide services, purchase insurance and implement programs, or in some cases stay solvent. Since that time, a series of legislative acts and court rulings evolved into what has come to be known as a “Joint Powers Authority” (JPA).
As described in the 2007 report, Governments Working Together, by Trish Cypher and Colin Grinnell:
“Joint powers are exercised when the public officials of two or more agencies agree to create another legal entity or establish a joint approach to work on a common problem, fund a project, or act as a representative body for a specific activity.
“Agencies that can exercise joint powers include federal agencies, state departments, counties, cities, special districts, school districts, redevelopment agencies, and even other joint powers organizations. A California agency can even share joint powers with an agency in another state.
“Examples of areas where JPAs are used commonly include: groundwater management, road construction, habitat conservation, airport expansion, redevelopment projects, stadium construction, mental health facilities construction, educational programs, employee benefits services, insurance coverage, and regional transportation projects.
“For example, the City of San José signed a joint powers agreement with Santa Clara County to jointly administer redevelopment funds. In another example, the City of Palo Alto has a joint powers agreement to provide cable television service to area residents.”
Over the years, JPAs evolved from simple partnerships into highly complex entities that increasingly had more and more governing powers, previously only reserved for elected governing bodies, including the power to assess fees and sell bonds. In its latest iteration, a JPA’s increasing powers were codified in the Joint Exercise of Powers Act, SB 1350, Senate Local Government Committee, in 2000.
In the beginning, JPAs worked well. But like many simple ideas with noble goals, JPAs have morphed into something far beyond the intentions of their creators. Like the big banks, creative minds have used this vehicle to assemble shadow government agencies that operate pretty much off our radar and without public scrutiny. And more and more, it appears that’s become the real goal of creating them.
What started out as a way to provide more efficient and less expensive public services, has been seized upon by politicians as a method of eliminating public input and democratic process.
Again, noted by Cypher and Grinnell:
“JPAs are different from other forms of government because they are the only type of government formed by mutual agreement. Unlike other governments, JPAs are not formed by signatures on petitions, and they’re not approved by a vote of the people.”
A key point to note is that JPAs can exercise all the powers that are common to their member agencies. The only power they lack is the power to pass real estate property taxes, though they’ve learned to get around that by calling them fees. But think about this for a moment: all the powers of whatever level of government they are formed out of. And all of those powers without any of the historic checks and balances that are the foundation of our democratic system.
Yes, in theory, JPAs are created and managed by agreement between local or regional governments or agencies (water, power, sewer, police, housing, or cities and county governments) under the supervision of our local elected representatives or at the least the staff members or appointees of those elected officials. However, the reality is that almost all JPAs are run by politically appointed executives who have no prior relationship with any of the JPAs member organizations. They go on to hire their own staff and consultants to create the team that will manage and make decisions for this new “quasi-governmental” agency on a day to day basis.
In practice, a JPA’s actions go largely unsupervised by anyone after their formation is approved. And the locally elected officials who approved it, who are often unpaid volunteers, can’t possibly analyze their complexities and potential unintended consequences of what they’ve created. So it’s pretty much all done on good faith and a cursory review of the JPA’s annual report.
At the risk of being cynical, in the sage words of Warren Buffet: “Only invest in things that a moron could run, because sooner or later, one will.”
JPAs - “Off the Books” Government
Entities like the Marin Energy Authority (MEA), the Sonoma-Marin Area Rail Transit (SMART), and most notably the Association of Bay Area Governments (ABAG), are all JPAs. None of the executives who make policy decisions or direct staff reports are elected.
Today, JPAs can take on debt (sell bonds, borrow money, etc.) without any vote by ratepayers or taxpayers or elected representatives, even though many provide critical public services or infrastructure.
In theory, JPAs are separate legal entities and their financial liabilities are not the public’s responsibility. But is that really true, in practice? If MEA or SMART or ABAG gets into financial trouble because of the debt they’ve issued or a construction project they’ve undertaken has cost overruns, or they default on debt and their project, that’s providing critical services to thousands of residents, is only half built, will we really say it’s not our problem to bail them out?
Let’s not forget that, “technically” under the law, we had no legal liability for all the defaults and losses of the banks in 2008. After all they weren’t even quasi-governmental entities. They were private for profit companies. Yet we were forced to bail them out with taxpayer money because they were deemed “too big to fail.”