[lbo-talk] Fitch on unions & health insurance

Michael Pollak mpollak at panix.com
Sat Dec 31 09:57:44 PST 2005


On Thu, 29 Dec 2005, John Lacny wrote:
>
> Also, isn't Fitch the same guy who wrote that pretty clueless article
> about SEIU and homecare a while back? I don't know much about him, but I'm
> not getting the impression that he's worth reading.

[Here's an interesting article by him in the forthcoming Nation on the corruption at the heart of the MTA. And I think the first paragraph, which is almost entirely extraneous to the article -- and seems put there purely to bell the balls of union leadership and anyone who supports them -- pretty much sums up his odd perspective. He takes the the viewpoint of extreme left wing unionists, the small and usually never-heard-from-in-public faction which thinks almost anything the leadership does is an immoral, spineless compromise. He then does his best to back that up. The result is so super critical that it often reads like a right wing attack. And sometimes he's dead wrong because his premises are completely unreal about how much could be gained and how much the risks are. But once you keep that in mind, his stuff is often worth reading simply because as the work of a diligent and knowledgeable investigative reporter with a virtually unique perspective for a mainstream paper. Even when his conclusions are wrong, he often turns up useful and interesting stuff that nobody else does.]

New York's Real Transit Crisis

by ROBERT FITCH

[posted online on December 30, 2005]

Now that New York City's first transit strike in a quarter-century has

been settled, a furious debate has begun over who actually won. This

time the union leadership and the Metropolitan Transit Authority (MTA)

are on the same side, insisting that their agreement is the greatest

transit contract since the opening of the IRT subway in 1904, while

the union's left opposition thunders that the contract--which has yet

to be approved by the membership--is a huge and disastrous sellout.

But if the result of the strike is sharply disputed, no such

disagreement surrounds its cause. Union president Roger Toussaint and

MTA chair Peter Kalikow agreed: The epic tussle was caused by

pension-fund problems. "Were it not for the pension piece," said

Toussaint, "we would not be on strike." Kalikow, for his part, pointed

a trembling finger at a coming "tidal wave" of pension costs.

Commentators across the political spectrum are chanting in chorus that

New York's labor pains grow out of soaring, uncontrolled pension

obligations--a national problem. "The states can no longer deny the

math," advised the New York Times editorially in a December 25

Christmas card to the transit workers. Something has to give, the

paper argued. If union members are so touchy about the erosion of

their pensions, better for them to give up some health benefits (as in

fact they did, agreeing to pay 1.5 percent of their wages toward

healthcare premiums). "The workers won't like that," the editorialists

predicted, "but it's unlikely they will find much empathy from riders,

most of whom...have been paying toward their own premiums for a long

time." But before succumbing to holiday-season resentment, perhaps we

should recheck the MTA's math.

Some Big Apple skeptics won't believe any numbers put out by either

the MTA or by Kalikow. A couple of years ago, the MTA got caught by

both the city and state comptrollers keeping two sets of books to

justify a fare increase--one for the public, the other for those with

a need to know. "It is impossible for people to be this incompetent,"

observed the city's comptroller. "This was clearly willful." Kalikow

angrily denied there were two sets of books.

Fortunately, though, we don't have to take either Kalikow's word or

the MTA's on the authority's actual financial condition. Independent

budget analysts agree that while pension costs are going up, they're

not the biggest problem. The real budget buster--twice as large as the

pension shortfall and going up faster--are debt-service costs. And the

reason they are out of control has more to do with dubious financial

management and the MTA's all-embracing culture of inside self-dealing.

A Votre Service, Messieurs

For more than a decade now, under Governor George Pataki, who controls

entry onto most board seats, the MTA has evolved into a five- star,

tax-supported French restaurant for the city's FIRE elite (finance,

insurance and real estate). A throng of hungry, elegantly tailored

freeloaders can be regularly found at the MTA's Madison Avenue

headquarters feasting at the public weal: investment bankers seeking

no-bid bond business, developers angling for bargain properties,

landlords who want the MTA as a generous tenant, mobbed-up contractors

seeking construction business and fabulous fixers like Al "The Fonz"

D'Amato--the former US senator who plucked Pataki from his Peekskill,

New York, obscurity and who, in 1999, got paid $500,000 for one call

to the MTA chief on behalf of an MTA landlord. They're all chowing

down under the eyes of MTA maitre d' Pataki, who guides them to their

customary tables while receiving generous tips.

Most generous indeed: The year of his appointment as MTA chief,

Kalikow and his wife gave Pataki $80,000. Just last June Kalikow's

wife, Mary, donated $15,000 to Pataki, although he wasn't running

again for governor.

What's in it for Kalikow? Well, if you want to land a contract with

the MTA it does seem to improve your odds if you rent space in one of

his properties. D'Amato's lobbying outfit, Park Strategies, operates

out of the twenty-fifth floor of Kalikow's flagship tower at 101 Park

Avenue. One floor up is subway-car contractor Bombardier. Last summer

Bombardier won a $425 million MTA contract. That brought the total MTA

revenue for the Montreal-based vendor, which has been plagued by

delivery and repair problems, to $2.5 billion. EA Technologies,

another MTA earner, rents space at Kalikow's 195 Broadway tower. In

2000, when Kalikow was vice chairman of the MTA board, EA Technologies

was part of a joint venture that was awarded a $141 million contract

to install a fiber-optic communications network for the Transit

Authority. But as an MTA spokesperson told the Daily News, Kalikow

didn't vote on the contract.

Just below Kalikow in the MTA hierarchy is one of the two vice chairs,

David Mack. He's the brother of Earle Mack, who in winter 2003 flew

Pataki in a jet he co-owned to a St. Bart's retreat in the Caribbean.

(Pataki said he paid for the flight and the hospitality, but he denied

FOIA requests to provide canceled checks.) More recently Pataki spent

several days as Earle Mack's guest in Helsinki, when Earle was serving

as George W. Bush's Ambassador to Finland.

The Macks--who own some 25 million square feet of office and retail

space in the New York metropolitan region--have reason to be generous

hosts. In 2003 the Port Authority agreed to build a $150 million spur

to the family's latest project: Xanadu Meadowlands, a

1.3-million-square-foot shopping mall and sports complex that includes

an indoor skiing dome. Perhaps not coincidentally, David Mack has sat

as a Pataki-appointed commissioner of the Port Authority since 1997.

David Mack and his wife gave Pataki $54,800 for his 2002 gubernatorial

race.

The other MTA vice chair, Ted Dunn, has been a loyal contributor, as

have members of his family; they gave Pataki $34,000 for his 2002

race. Ted Dunn is the former managing director of Morgan Stanley,

world's biggest investment banker. Although as recently as 2003 this

whitest of white-shoe Wall Street firms was in turmoil because of

federal conflict-of-interest charges, it serves as senior manager for

hundreds of millions of dollars' worth of MTA bonds. This past

February Morgan Stanley shared the senior manager's role with JP

Morgan and Merrill Lynch. At customary commission rates, the syndicate

members would share anywhere from $20 million to $60 million for a few

days' work. The MTA's financial managers make more or less depending

on how fast they sell the bonds. Naturally, it's in the interest of

the managers to sell at a higher rate--and against the interests of

the MTA, which benefits from a lower rate. But no one seems to be

monitoring the MTA's bond syndicates to check for profiteering.

In 2000 the MTA did hire a financial adviser. He was Robert Foran,

managing director of Bear Stearns. Foran advised, Dick Cheney-style,

that Bear Stearns be the lead underwriter for the authority's $17

billion capital plan for 2000-04. So Bear Stearns, another Pataki

campaign contributor, got the top-of-the-food-chain spot to eat the

$100 million in commissions generated by the bond sales.

They pay thousands in order that we pay billions. Together the

fabulous freeloaders threaten to bring back that old 1970s show:

financial crisis, layoffs, service reductions. After all, the

silver-haired Kalikow has bankrupted the last two institutions he

headed, the New York Post and his family real estate business. He

could be headed for the hat trick.

The MTA owes more than $20 billion in debt-service costs. And it's

planning a huge new $27.8 billion capital plan that heavily depends on

more borrowing. By 2015 debt service will eat up nearly a quarter of

all MTA revenue. Just to keep the debt service at its current level,

MTA revenues will have to increase nearly 10 percent a year.

No one wants to go back to the bad old days of the 1970s and early

1980s, when subway rides were fourteen times more likely to break down

than today. But MTA money is not going for needed maintenance. To

quote David Gunn, the former MTA official credited with being most

responsible for bringing the subway back from the brink, MTA funds

aren't going for "nuts and bolts" but for "big sexy projects."

Of course, eros here is in the eye of the beholder. No doubt spending

$481 million to build a platform over its West Side yards is hot stuff

for the MTA directors. It would enable them to build another

headquarters and sell off more midtown properties. But it's an amount

equal to the increase in pension-fund costs until 2008. And it's

unnecessary. As New York State Comptroller Alan Hevesi points out,

there are developers who've offered to build the platform for free.

The Bada-Bing Boys

Perhaps the hottest real estate project in recent MTA history is the

authority's new 2 Broadway headquarters. The 2 Broadway tale could be

one of those immigrant rags-to-Armani sagas New Yorkers so savor. But

in a contemporary twist, a competing story line implicates the mob and

MTA crony culture, with hundreds of millions in cost overruns-- and

huge, long-term debt nearly equaling the cost of building the project.

The story begins with a former cab driver from Soviet Georgia, Tamir

Sapir. In the mid-1990s Sapir bought a distressed

1.6-million-square-foot clunker from the bankrupt Olympia & York

empire for what amounted to pennies in mogul money--$20 million. Then

Sapir offered to lease it to the MTA. But the building wasn't exactly

in move-in condition. The MTA insisted it be fixed up, which the

cash-strapped Sapir couldn't afford. He couldn't start remodeling

without a loan, and he couldn't get a loan until reluctant MTA staff

professionals approved the project. To smooth out the hitch, Sapir

turned to The Fonz. Former Senator D'Amato called the head of the

MTA--Kalikow's predecessor, who was also a Pataki appointee and who

also rents space in Kalikow's 101 Park Avenue Tower--and got the

approval. This is the famous half-million-dollar phone call D'Amato

made in 1999. For just having the guts to make a cold call, D'Amato

earned $100,000. Because the deal went down, he got an extra $400,000.

Eventually Sapir was able to shift the cost of the call to the riding

public.

But Sapir's 2 Broadway problems were just beginning. He was a deal

guy, not a hands-on construction supervisor, so he turned over control

of the remodeling to Fred Contini, who used to work for him. But

sadly, as it turned out, Contini really worked for the Gambino crime

family. Specifically, Eddie Garafola, brother-in-law of Gambino

underboss and multiple murderer Sammy "the Bull" Gravano. Companies

controlled by the Gambinos got ten separate subcontracts on the 2

Broadway job.

Under Garafola's construction site management, there ensued the

classic labor peace racket: Three unions on which the mob has leverage

agreed to go along with the requests of mob-controlled companies,

pretending to hire union labor at the union rate but instead hiring

nonunion workers, while billing at the higher rate, keeping the

difference as a kickback or distributing it to the mob-controlled

subcontractors. Payments to nonexistent workers were collegially

laundered by fellow wiseguys in the Genovese crime family.

Meanwhile, project costs went up and up. There was an early estimate

of $135 million, but now State Comptroller Hevesi says the real number

will be closer to $450 million; with interest, it balloons to $850

million. Here was a building that cost about $8 a square foot but will

wind up costing more than $700 a square foot. And all for a building

MTA is leasing, not owning.

Investigators have ruled that none of this was either Sapir's or the

MTA's fault. Both were victims. Sapir did admit he hadn't carefully

supervised Contini and was frequently away on business trips. "When

the cat's away, the mice will play," explained Sapir to a New York

real estate magazine interviewer. One fact not yet nailed down by

investigators, though, is how the former cab driver from the former

Soviet Union, with little capital and less experience in highrise

rehab jobs, got a mammoth nine-figure, no-bid MTA lease. It's "a

secret government," observes Democratic State Assemblyman Richard

Brodsky, who's been probing the MTA in Albany.

Unfortunately, the MTA is no anomaly. It's just one fairly big

province in a much larger governmental empire--the New York

"authorities," which tend to operate under permissive governance and

financial principles. In 2004, when last audited, New York's 734

authorities owed altogether nearly $120 billion. Unlike the state, the

authorities don't need voter approval to issue bonds. Unlike the city,

they aren't limited by the value of real estate. All they need to

reach the financial markets are bond dealers who want a payday. That's

why authorities were invented.

But although the city and state are able to finance projects by using

the authorities, they're approaching crunch time too. In December the

New York City Comptroller issued a report saying the city had $69

billion in debt. And the state--separate from the authorities--is

indebted to the tune of another $48 billion. So the three New Yorks

combined owe $237 billion.

If New York were a sovereign country, it would rank eighth in external

debt, edging out China. With that kind of obligation, no wonder one

financial expert quoted on the strike's first day by The Bond Buyer, a

Wall Street daily specializing in public finance, estimated that the

city could not take much more than one week of the walkout before its

own securities came under pressure.

It's also no wonder that as far as the city's FIRE elite are

concerned, that middle-aged black woman who cleans subway platforms is

no Rosa Parks. Selfishly, she wants to escape the scurrying rats and

suffocating metal dust by retiring at age 50; an Albany bill sponsored

by the transit union to accomplish just that failed when Pataki vetoed

it. Is there a political lesson here? After transit workers struck,

Pataki ordered the state to impose heavy Taylor Law fines. Brian

McLaughlin, head of New York City's Central Labor Council, proposed

that each of the city's 1.5 million union members contribute a dollar

as a principle of solidarity to each striking transit worker. A more

practical strategy, though, might have been for each of the transit

union's 33,700 members to have given a dollar to Pataki.



More information about the lbo-talk mailing list