Here is my latest article for the south end news.
January 1, 2009
Mayor Menino’s Ponzi Scheme
When I was a young boy my mother bought me a book called “Great American Crimes and Trials” and I remember being fascinated by the story of Charles Ponzi, the Italian immigrant who made millions in Boston in a short amount of time by promising immense returns based upon inequities in international stamp exchange rates. Once Barron’s did some actual financial analysis of the scheme, the house of cards collapsed.
Maybe thanks to my mom’s early intervention, I’ve had a penchant for smelling too good to be true deals. Long time South Enders will remember many stories in the South End News about Nancy and John Burgess swindling locals in financial and real estate deals. I worked with the Attorney General’s office to catch them, culminating in a heart stopping arrest at 16 Holyoke Street of John Burgess by a broad State Policeman, who made John put his hands against the wall to handcuff him—right into the wet plaster we were installing on my jobsite! Years ago, the Midwestern wing of my family, mostly farmers and union workers came to me with an investment vehicle they were involved in bankrolling worldwide concerts. I warned them that the consistent returns, constant reinvestment, lack of documentation and incorporation in Louisiana seemed dubious. Alas they were blinded by the dollars and lost everything except for my surfer cousin who was too lazy to send in the reinvestment documentation and got his $10,000 out!
Ponzi is in the news again thanks to Bernard Madoff who has taken investors and charities for a $50 billion dollar ride, including many in the Boston area. Modern Ponzi artists don’t offer the doubling of money in 90 days like Ponzi did, but instead slowly lull the victim into a false sense of security before they get whacked.
I’d like to warn you about the Ponzi scheme that our Mayor is weaving. From his office on the fifth floor of City Hall he can look south right at 27 School Street where Ponzi used to operate from, and I believe they are not just sharing a common locale, but the knowledge that their financial basis is not stable.
Like derivatives and other discredited financial tools, it is a bit complicated (otherwise you could easily discern it isn’t solid!) but I will try and simplify. In Massachusetts Proposition 2 ½ is in place to protect citizens from unreasonable increases in their property taxes imposed by the politicians. The total property taxes collected, known as the levy, should only increase by 2.5% percent a year. However, the city can also add on taxes generated by the value of new construction. This practice has helped to drive up Boston’s levy by 5.4% annually over the past 10 years, almost double the rate of inflation in a city with virtually no population growth and a shrinking student population. This now adds approximately $60 million in new tax burden for city residents and businesses every year.
So when the Mayor pushes new high rise towers like Columbus Center, allows developers to exceed zoning limits agreed to by the citizens , or tries to sell City Hall, he knows, like Ponzi, that he needs that new revenue to pay off his old debts. The old debts in this case being the union contracts he signs with pay increases of more than 2.5 percent a year with outrageous pension and benefit clauses, and an army of new city employees he hires to do his bidding. There has been an increase of 7 percent of city employees in the last 5 years (16,048 workers in 2004 and 17,216 projected for 2009), and the school enrollment has dropped (55,800 students in 2008/2009 as opposed to 57,742 in 2004/05 school year). According to his own figures, these new employees to the City Payroll would be the 40th biggest company in Boston on their own (http://www.cityofboston.gov/bra/PDF/ResearchPublications//pdr509.pdf) right behind the Faulkner Hospital and the Federal Reserve Bank of Boston. Are you getting 7 percent better service from City Hall? Why do we still test in the bottom 5% of school districts in the state? Exactly what are those 1200 additional workers doing? Why is he talking about laying off cops when there are 1000 other city workers that should go first?
The economy which popped Madoffs’ bubble is about to pop Menino’s bubble as well. If we don’t get new investors (new construction) we can’t pay out requested withdrawals (union contracts and new hires) and the whole scheme comes unraveled through budget cuts and layoffs. In this economy, with the credit crunch, getting new construction done will be extremely difficult. Again, the tax rate structure is complicated, but because the value of commercial real estate is dropping, we the residents are going to be made to make up the difference essentially like loan guarantors for Menino’s poorly negotiated contracts, pensions and new hires. At least cities like Newton and Wellesley are taking their funds and building new state of the art schools, what do we have to show for the additional $212 million over and above the allowed Proposition 2.5 percent increase Menino and the City Council have levied on us in the last 7 years? We haven’t built a new high school since Menino has been Mayor.
On Ponzi’s deathbed he had a message for the Bostonians he swindled “Even if they never got anything for it, it was cheap at that price. Without malice aforethought I had given them the best show that was ever staged in their territory since the landing of the Pilgrims! It was easily worth fifteen million bucks to watch me put the thing over.” I’ll bet his victims didn’t feel they got their moneys worth from him, and I doubt that Madoff’s investors, or Boston taxpayers feel they are getting the best investment for their money either.
Financial Analyst Steve Wintermier contributed to this article