Merry Something to You

A small holiday wish from Devo to you.

Punish the workers

It is a sad day in Missoula when a local employer lays off 417 jobs. It is even sadder that it was management who caused, through bad decisions, the operation to close down. But, nearly everyone in the pulp and paper industry knew that it was only a matter of time before Smurfit-Stone shuttered the Frenchtown mill.

Why is that? Nearly a year ago Smurfit-Stone Container filed for Chapter 11 Bankruptcy. At the time, chairman and CEO Patrick J. Moore said, “Our financial performance has not reflected the full potential of our earnings power due to higher cost operations and burdensome debt levels dating back to the original formation of the company.”

Did you notice that bit about burdensome debt levels? At one stage, Smurfit-Stone Container was leveraged to the extent of 70 percent of capital. Hardly wise management, but instead this was celebrated back in 1989 (the go-go 80’s) as an ambitious company batting above its average on the way towards becoming a global behemoth.

In March 1989 Stone paid $2.2 billion in cash and securities for Consolidated-Bathurst Inc. (CB), Canada’s fifth largest pulp-and-paper company. The purchase made Stone Container the world’s second largest producer of pulp, paper, and paperboard; a major player in newsprint; and gave Stone Container a foothold in the European market through CB’s Europa Carton subsidiary and U.K. plants. Investors even back then worried about the $3 billion debt, but management thought it was easy enought to sell-off some of the non-core assets. The deal, though, was financed by banks and eventually they called in their obligations. The debt nearly caused Stone Container to collapse in 1993 when the debt had risen to nearly $5 billion.

Still the company continued on its spending binge, all with the aim of becoming what they are now – North America’s largest manufacturer of paperboard packaging. In 2000, it purchased St. Laurent Paperboard Inc. of Montreal for about $1 billion in cash and stock. In 2002, it paid $375 million for the MeadWestvaco Corporation’s Stevenson, Ala., mill and the seven plants and 82,000 timberland acres that supply it. It was still splurging as of 2008.

Ever since then, through mergers, reorganizations, fire sales of assets, broad redefinitions of strategy and assorted restructuring programs the debt load has constantly dragged the company down. As of of Sept. 30, 2008, the company was still $5.6 billion in debt with only $7.5 billion in assets.

What about the Missoula mill? Well in a gentle farewell to workers, Smurfit president Steve Klinger said on Monday that the Frenchtown mill was a high-cost facility that did not provide adequate returns over the long term for the company.

Really? Because in 2008 a strategic review that the company conducted with outside experts determined that its mill system was very cost-competitive, with about two-thirds of its plants in the top half of the cost profile. This was after they’d already closed a 180,000-ton linerboard machine in Montana. So, either they already knew that Frenchtown was one of the dogs, or they just couldn’t be bothered to fix it.

I dunno. Maybe the workers could see what was coming and were just hoping things would work out fine. But, I can’t help but think that the company hasn’t been completely honest with the crew. I guess it is hard for management to admit they’ve been screwing up for over 20 years. Patrick Moore and the bosses in St. Louis, however, will all keep their jobs. And, to put the icing on the cake, Smurfit-Stone may pay out up to $47 million in bonuses to executives and other employees in 2009. I don’t think any of the folks in Frenchtown will be getting them.

The Power of the Rich and Famous

Private property rights are big news in the courts these days.   Many will know of the landmark Supreme Court 2005 decision in Kelo v. New London. It started a backlash of legislative action across the country to stop the perceived excesses of government seizure of property.

But, it didn’t ‘t stop there. Continued legal judgments are re-writing the relationship between government and property owner. The Supreme Court is now hearing arguments in Stop the Beach Renourishment Inc. v. Florida Department of Environmental Protection, the New York Appeals Court has ruled in Goldstein v. New York State Urban Development Corporation, and in In re Parminder Kaur v. New York State Urban Development Corp. (The federal courts in these sorts of cases have shown much deference to the determinations of state courts.)

Each of these cases raises the issue of who gets to decide what happens to a piece of private property. Is it the landowner? Or the government who needs the property for some greater public use (typically for the construction of highways, power lines, and other public utilities)? Or, is it the rich and famous who can utilize government to achieve their private profit?

The Supreme Court case concerns the ability of the state to protect natural resources and promote public recreation. (Sound familiar, as in the Mitchell Slough case recently settled by the Montana Supreme Court? Yep.) In Florida, the state government restores and protects beaches from erosion by dumping lots of sand in the water. This creates new beach and the question before the SCOTUS is who owns that sand.

The first NY case concerns the $4.9 billion Atlantic Yards Arena & Redevelopment Project and whether the city can seize private property for the development of a new stadium for the Nets basketball team. The question was whether the use of eminent domain by the city was correctly for public benefit. Like Kelo v. New London, appellates argued that economic development in blighted areas was beneficial to the public since it cleans up unsanitary and unsafe urban conditions as well as maximizing economic use of the land. But, who determines what is in the public’s best interest?

The second NY case concerns Columbia University’s wish to build a new $6.3 billion campus and have New York city seize privately-owned portions of the 17-acre swath of Manhattan’s upper west side. (Former-Missoulian Daniel Nairn has a brief discussion of this case at the excellent Discovering Urbanism blog).Here, the court ruled that the development was not a public use because Columbia is a private institution. Further, the “blighted” designation of the properties was made by a consultant for Columbia, further muddying the case that it was for public benefit.

While I think the Florida case is somewhat obvious (just because the state dumped some sand in the water doesn’t create more public land), the others each demonstrate the dangers of public-private partnerships. When you mix in private profit (typically through real-estate development) with improvement of the public condition, it is not clear for whom the government is most acting. While the taking of private property is allowed under the Fifth Amendment to the United States Constitution, it cannot be done without just compensation and must be done with a clear sense of it being done for public use.

It becomes very hard to argue with a business project that also includes some sort of educational, cultural, recreational, community, municipal, public service or other civic facility. Certainly, the small homeowner in the ‘blighted’ area is going to have a hard time incorporating this. But, if you call in your buddies on the Economic Development Corporation, those folks in the Downtown Association, and the friends in the Chamber of Commerce, then many a city council or commission is going to see things your way. As was seen in the case in NY, when you deal with $5 or 6 billion project, involving the Mayor, affordable housing advocates, and a pro-sports team (as is the case in New York), strong indeed is the political pressure on government decision making.

Think this couldn’t happen in Montana? Title 7, Chapter 15, Part 42 and 43 of the Montana Codes Annotated (M.C.A.) authorizes municipalities to “acquire by condemnation, as provided in Title 70, chapter 30, any interest in real property that it considers necessary for urban renewal“. The municipality has to make a finding that a blighted area exists that is “conducive to ill health, transmission of disease, infant mortality, juvenile delinquency, and crime, that substantially impairs or arrests the sound growth of the city or its environs, that retards the provision of housing accommodations, or that constitutes an economic or social liability or is detrimental or constitutes a menace to the public health, safety, welfare, and morals in its present condition and use“.

Well, such a declaration was, for example, made for the River Road neighborhood in Missoula. Guess who made that determination? The Missoula Redevelopment Agency. And, guess who’s on the board of MRA? Hal Fraser of First Security Bank; Dan Kemmis of the University of Montana; Nancy Moe, attorney; Rosalie Cates of Montana Community Development Corporation; and Karl Englund, attorney. Sounds like a bunch of Good Ol’ Boys & Girls to me.

And, yes, they’ve handed out public funds to benefit private development. I wonder if they’re friends with the Rich and Famous?