Zero Sum Game

January 12, 2014

Our elected officials love to make noise about ‘holding the line on taxes’ — whether at the federal, state, county or local level.

In the private sector, we know there are 2 ways to improve fiscal efficiency. One way is to increase revenues, either by selling more products or raising prices on existing products. Another is to reduce costs.

The public sector is much more complex, because of the layers of government which often overlap and have some redundancy.

One thing is clear: if the federal government cuts back on safety net services to reduce costs, the need for those services is still there. Provision of services (or some substitute) thus rolls down to the state, county or local level. In the jargon of economists, that’s known as the ‘Zero Sum Game’.

I live in the City of Mount Vernon in lower Westchester County NY.

Westchester has a very large share of residents who are among the wealthiest Americans. Some call their Westchester residence home, while others use their Westchester property as a secondary or tertiary residence. Because of these very wealthy families who own extraordinary properties, Westchester has one of the highest median property values in the United States, and is ranked 1st of the 3143 U.S. counties in order of median property taxes.

What they fail to mention is that most properties in Westchester County are taxed by 3 different entities: The County (18%); the municipality (22%); and the school district (60%).

For me and my Mount Vernon neighbors, the estates of the landed gentry might as well be on another planet.

Those of us who live in Mount Vernon are seeing the effects first hand of what happens when politics gets in the way of reality. We experienced a very contentious and hard-fought battle for the office of County Executive in the second half of 2013.

The incumbent, Rob Astorino, campaigned relentlessly on his Tea Party platform of No Tax Increases!

Despite the fact that county property taxes in Westchester typically represent less than 20% of the total property tax burden, the sound bite of No Tax Increases, combined with a consistent message that his opponent – in his role as Mayor of New Rochelle – had raised taxes on New Rochelle property owners, Mr. Astorino gained the support of a number of factions, including some elected officials, and he was re-elected.

Now, because the County has not increased taxes, it has cut funding for vital services, and guess where the vital services are most needed?

Cities like Mount Vernon, Yonkers, New Rochelle, Peekskill are left holding the bag. No funding from the County for services? City taxpayers pick up the tab in their City budget, instead of spreading the tax burden across the broader County tax base and allowing property owners in all areas to share the cost of services which tend to impact most on lower-income areas.

A recent report ranked 4 Westchester towns — including Briarcliff, Lewisboro, Irvington and Pleasantville — as some of the safest areas in New York State to live. Those folks can well afford to pay for great schools, plenty of police, etc. in part because they don’t get burdened with covering the costs of services in less affluent communities.

Here in Mount Vernon, we have an elected City Council member who was a vehement supporter of Rob Astorino in his re-election campaign, loving the promise of no tax increases. Now, the City taxpayers are facing an 8% City tax increase in order to maintain some semblance of vital services which the County will no longer provide due to budget cuts.

Our City Council member is visiting somewhere in the Twilight Zone, creating her own illusions of reality, and she has supporters who believe in her?

Let me warn you folks: Don’t drink any of her Kool Aid! And, be very careful of the messages you hear on the election trail!

August 2013.

Westchester County is known as the bucolic gateway to the Hudson River Valley. Located just north of New York City, Westchester has a plethora of attractions, including castles, mansions, historical sites, and the iconic Playland Amusement Park in Rye.

Westchester boasts thousands of acres of parks and nature preserves; world-class museums and performing arts venues; exclusive shopping, wineries and orchards; public gardens; excellent dining; and year-round, family-friendly fairs and festivals.

That’s what current Westchester County Executive Rob Astorino and his cronies would like the world to know and believe.

The real Westchester County consists of 45 independent communities on a land area of 450 square miles. Just under 1 Million people live in Westchester, and they are racially, economically and culturally segregated.

From the City of Peekskill (population 24,000) where 51% of the population is white, 14.5% live in poverty, and the median family income is $65,585; to the City of Rye (population 16,000) where 90% of residents are white, just 2.3% live in poverty, and the median family income is $210,824; the contrasts are dramatic.

Meanwhile, it is very clear: Current County Executive Rob “I cut your taxes” Astorino has no shame.

Much like Don Quixote jousting at windmills, Mr. Astorino loves to do battle with various federal agencies. As he stamps his feet and screams, “I want my Maypo”, he tries to divert attention away from the huge financial penalties Westchester County Taxpayers face because of his incompetence, inability to lead and inexperience managing an organization of any size.

The most recent revelation?

The County had been given a deadline of April 2012 to provide Ultra Violet treatment to the water in Westchester Water District 1 which serves White Plains, Scarsdale, Mount Vernon and Yonkers.

Career professionals in the County had developed solutions; Astorino allowed the progress afforded by the solutions to grind to a halt.

Now, we find out that the County has been in violation of the mandate to deliver clean drinking water for 16 months, with probable fines of $37,500 a day. 16 months x 30 days x $37,500 is $18 Million. That’s a lot of money!

Cryptosporidium is the pathogen that is often behind the syndrome sometimes known as “Montezuma’s Revenge.”

It is highly resistant to chlorine disinfection, which is the primary form of disinfection used at most water treatment plants.

As long ago as 1999, the US EPA published definitive research showing that UV treatment is the only reliable and effective treatment system against all pathogens, including Cryptosporidium.

It is somewhat surprising that CE Astorino would mess with folks in Scarsdale.

His predictable pattern of abuse and benign neglect tends toward Mount Vernon, Yonkers, Port Chester, Peekskill and New Rochelle. Those folks just don’t seem to make time to come out to vote, and they mostly don’t make campaign contributions.

Maybe his campaign advisors told him, “Don’t worry, boss. People in Scarsdale don’t drink tap water. They drink bottled water. They will never find out that we are sending them potentially dangerous water.”

Hopefully, some of our neighbors in Scarsdale who do vote will get a bit vociferous about the gamble Astorino and his cronies seem to be willing to take with the physical (and financial) health of fellow Westchester residents.

The Environmental Protection Agency filed a lawsuit against Westchester County this month after county officials refused to enter into a consent decree to resolve the violations.

The potential legal fees and fines are astronomical.

What is even worse?

The lack of UV treatment puts thousands of Westchester residents (the majority of whom are registered Democrats!) at extreme risk of serious illness or even death from drinking improperly treated tap water.

Pretty clever political strategy, I think.

If you can’t convince the other party you have a solid plan and strategy, then disable or kill them so they can’t vote.

Brilliant move, Mr. Astorino!

The Town of Clarkstown — located in Rockland County in New York’s lower Hudson Valley — today is a suburban town comprising 47 square miles with a population of 84,000.

Clarkstown is predominantly white and middle class. According to the 2010 Census, just 4.5% of the people who live in Clarkstown are at or below the poverty level. The median household income is $102,000 and the median home value is $500,000. About 80% of the homes in Clarkstown are owner-occupied, and the majority were built after 1950 as Rockland County transitioned from a predominantly agrarian economy to a bedroom community for the New York metro region.

In 2010, CNNMoney.com named Clarkstown the 41st best “small city” to live in America, which was the highest such ranking in New York State.

One would think that in a stable suburban town like Clarkstown, public safety would be of paramount importance to residents, yet the job of policing would be less stressful than in nearby high-density, inner-city areas where danger lurks around every corner.

New York City — one of the most complicated places in America in terms of ensuring public safety — has a police force of 34,000 supervised by the New York City police commissioner who earns annual salary of $215,000.

For some reason, Clarkstown has a history of providing the highest compensation to police officials in the lower Hudson region. In Clarkstown, an entry-level police officer makes a base salary of $62,000.

In nearby and contiguous towns, entry-level police officers earn between $40,000 and 43,500 per a year in base pay.

In 2010, it was reported that then-Clarkstown Police Chief Peter Noonan was the highest paid municipal employee in New York State — earning just over $301,000.

At the time, he was supervising a force of 173 police officers, of which 147 made more than $100,000 in base salaries, not including overtime and other earnings.

Noonan retired in 2011 after spending 33 years in the Clarkstown police department, the last seven as Chief.

When he retired, his annual pension was calculated to be $193,892 based on the formula New York State uses to calculate pension benefits.

A recent recalculation by the NYS Comptroller’s Office has added nearly $13,000 to Noonan’s retirement benefit, bringing it to $206,398, the highest pension for a retired cop in New York State.

Noonan now has the eighth highest pension among municipal retirees in New York State and is one of 10 pensioners with an annual benefit exceeding $200,000.

You think Detroit has problems?

Rob Astorino – young and inexperienced – was elected to become County Executive in Westchester County NY in November 2009. He ran on a Tea Party platform — at the time (and still today), property owners in the 40+ towns, villages and cities in Westchester County were paying about the highest property taxes in the U.S. Astorino won the election on his promise to cut Westchester County property taxes.

Good news: he succeeded. He delivered what he promised. My County property taxes have decreased by almost $200 since Rob Astorino was elected!

On the other hand, my total property taxes – including City, School and County – increased by +$3,500 since Mr. Astorino was elected — an increase of over 18%.

Over the past 3 years, I have watched Westchester County cut support for safety net services and send the responsibility for providing those services downstream to the local towns, villages and cities.

That makes me very sad, because while the need for services doesn’t go away, and we can and do save $1 in taxes at the County level, only to find that our local municipal and school taxes go up by $3.

We need a County Executive who is able to see and understand the big picture, not a County Executive who has no experience other than as a silver tongued broadcast journalist. This is the 21st century, and we are in a very competitive economic environment.

We just can’t afford the distractions which come from our County leadership sparring with State or Federal government over issues like a consent decree for fair housing, or a mandate for clean water.

Noam Bramson gets it. He is a moderate, middle-of-the road leader who is able to see the big picture and make decisions based on the best interests of the majority of citizens today – and in the future — of our Westchester communities.

Let’s help Mr. Astorino return to his real strength – broadcast journalism – where he has the best chance of making a mark on the American landscape which doesn’t damage the lives of so many good people…..

Tea Party Thoughts

August 4, 2013

I’ve recently been called out as a bigoted liberal who is a ‘hater’.

I think the reason for that is that I take exception to some current Tea Party shenanigans. I try not to be a ‘hater’ but I am willing to call out when I see or hear commentary which seems to be non-productive.

Here are some Walrus thoughts:

A widely accepted view of Liberalism incorporates the political philosophy founded on ideas of liberty and equality. It is generally acknowledged that Liberals support ideas such as: free and fair elections; civil rights for all people; freedom of the press; freedom of religion; free trade; and rights of people to own and protect their private property.

The 17th century philosopher John Locke is often credited with founding Liberalism as a distinct philosophical tradition. Locke argued that each man has a natural right to life, liberty and property and according to the social contract, governments must not violate these rights.

The U.S. Constitution and Bill of Rights reflect that the very foundation of our country is based on Liberal principles.

The original ‘Tea Party’ – The Boston Tea Party (circa 1770) — was all about anger and resentment of British mandates on the Colonies – often summarized as an objection to “Taxation without Representation”.

Today’s Tea Party seems to claim a connection to the Boston Tea Party, though I don’t grasp their logic, or see any connection at all.

We have a governmental structure in the U.S. which allows and encourages everyone eligible to vote to get engaged in the political process and to vote. In 21st century America, there is no “Taxation without Representation”.

The basic tenets of the modern Tea Party – as I understand them – are to reduce government spending thus cutting taxes on U.S. citizens.

I’m all for that.

The only way I know of to reduce government spending is to re-engineer government.

The majority of my tax burden comes from a combination of taxes on: (1) Income (Federal and State); (2) Sales (State, County & City); and (3) Property (County, City and School District).

There are plenty of other taxes I pay which are buried in: my telephone bill(s); my utility bills(s); the gasoline I purchase; hotels I stay in; and airplanes I fly on.

Slashing spending without a plan to re-engineer government is a recipe for disaster.

Other than calls to “cut taxes, make government smaller and reduce spending” I haven’t heard or seen any sort of plan. Lots of noise, no plan? It wouldn’t fly where I work.

Fact is, the current Tea Party movement is quite similar to the Contract with America which was championed by Newt Gingrich in the 1990’s. It was all about shrinking the size of government, promoting lower taxes, and eviscerating safety net programs for disadvantaged people.

No plan, just a lot of noise.

Prior to that, we had The Moral Majority, which started in the mid 1970’s when Jerry Falwell created a national platform to raise awareness of social issues important to him and his followers.

The Moral Majority was launched and heavily supported by a coalition of conservative southern Christian right leaders, congregations and political action committees which campaigned on issues its personnel believed were important to maintaining its Christian conception of moral law, a conception they believed represented the opinions of the majority of Americans.

At its peak, the membership of the Moral Majority was in the 4 million range, with over 2 million donors. It was one of the largest conservative lobbing groups in the U.S. at its zenith. Their first key victory was the defeat of Jimmy Carter by Ronald Reagan in 1980, and they continued to have power and influence until the late ‘80’s.

Again, a lot of noise, but no plan to reduce the overall size of government.

Before that, many of our fellow Americans who identified with this ideology were members of the Ku Klux Klan, and some still are, apparently….

The Wal-Mart Paradox

July 10, 2013

With annual revenues in the $450 billion range and a global workforce of more than 2 million, Wal-Mart can’t avoid being in the cross-hairs of labor advocates because it may be the world’s largest employer. And, there are consistent allegations of worker mistreatment.

Wal-Mart started with good intentions, it seems.

Sam Walton opened the first Wal-Mart store in Rogers, Ark. in 1962. The strategy was very simple: low prices and good quality. By 1967, the Walton family owned 24 stores, ringing up $12.7 million in sales.

As it grew, it seems the company may have lost touch with the mission.

Today, it seems that Wal-Mart has become a predator.

It seems that when Wal-Mart comes into a community, it builds a vast, low-rise supercenter — often on land that hadn’t been developed before Wal-Mart showed up.

The chain now has 698 million square feet of store space in the U.S., up from 530 million in 2005. Its U.S. stores and parking lots cover roughly 60,000 acres.

Beyond the negative environmental impact, Wal-Mart destroys local economies through its predatory pricing practices. It generally destroys and decimates local, family-owned businesses; it hires people right at the margin: low wages; variable work hours; marginal benefits.

Wal-Mart invariably is the beneficiary of huge direct public subsidies and benefits, which include: free land; infrastructure assistance; below market financing; outright grants from state and local governments around the country; and property tax abatements, often called PILOTS.

On top of that, taxpayers indirectly subsidize the company by paying the healthcare costs of Wal-Mart employees who don’t receive coverage on the job and instead turn to public programs such as Medicaid.

Today, the extreme wealth of Sam Walton’s family is shocking.

While most Americans have done our best to work hard, be honest, fair and ethical, there seem to be a few pirates who have a different agenda.

The Walton family is dripping in wealth — from ill-got gains? – and, if so, that really concerns me.

We are on the slippery slope, but it may not be too late to stop the avalanche from happening.

If the avalanche does take place, our democratic society which has frequently been called “The Land of Opportunity” will revert to an oligarchy where a few uber-wealthy families completely control the economic destinies of the proletariat.

Imagine: Medieval Europe, reinvented in the 21st century!

Note: The Koch brothers (Charles and David) who are reportedly worth over $50 billion:

In 2011, Forbes called Koch Industries the second largest privately held company in the United States with annual revenues of about $98 billion. Charles and David Koch each own 42% of the company.

The Koch brothers spent some $400 Million in the 2012 elections attempting to elect right-wing candidates to the White House, the U.S. Senate, the U.S. House and various state governorships. There is no reason to think that similar efforts won’t continue into the future.

The Koch brothers have established or enabled dozens of right-wing organizations dedicated to: providing huge tax breaks to the rich and multi-national corporations; destroying trade unions and trampling workers’ rights; privatizing Social Security and Medicare; and eviscerating programs which backstop the lives of our middle class working families, as well as our neighbors who are retired and/or disabled.

The Koch brothers made their fortune in the fossil fuel industry, and are strongly supporting a massive disinformation campaign to discredit the science around ‘climate change’ and/or ‘global warming’. http://greenpeaceblogs.org/2012/04/02/koch-brothers-exposed-fueling-climate-denial-and-privatizing-democracy/

Most recently, the Koch brothers have announced their planned acquisition of the Tribune Newspaper chain — the nation’s second largest newspaper publisher. The Tribune Company chain includes such newspapers as the Chicago Tribune, the Los Angeles Times, the Hartford Courant, the Orlando Sentinel, the South Florida Sun-Sentinel, the Baltimore Sun, the Daily Press and The Morning Call — among other papers.

This is an outrageous and egregious slap in the face to our Declaration of Independence which formed the very foundation upon which the Constitution of the United States was based. At the time, the notion that “… all men are created equal” was a brand new paradigm in the history of mankind upon which to create a legitimate and enduring government.

The current shenanigans in Washington between the House, the Senate and the White House may be an early warning that even the best thought out ideas around governance have a limited life span, and that the pure thoughts of our Founding Fathers were bound to be adulterated and tainted by multiple generations of people who ran for – and were elected — to office with selfish and ulterior motives.

Many of the ‘fact checkers’ who examined President Obama’s remarks in his State of the Union address took exception to his notion that a $1 investment in quality early childhood education can return $7 in future benefits.

They cited some recent studies which have shown that the big vocabulary and social development gains for at-risk students in pre-kindergarten programs often disappear by the time these same students reach third grade. Unfortunately, one of the most recent studies (2012 HHS Head Start Impact Study) offered plenty of statistical data, but no explanation or hypothesis to address this counter-intuitive information.

In the U.S. we have 2 parallel childhood education systems: one for pre-K children which is federally funded and delivered through private, not-for-profit providers; the other for K-12 children which is funded by local and state sources and delivered through K-12 public school districts.

The funding streams are disconnected and the two systems are not required to talk with each other. It often turns out that children do not retain all of the benefits of a quality early childhood education program when the alignment and vertical integration issues between these 2 systems are ignored.

There is clear evidence which tells us that in those school districts where quality early childhood education (Head Start, etc.) is closely aligned and integrated with the K-12 structure, the performance drop-off is greatly reduced and/or eliminated.

A recently released report from Center for American Progress – http://www.americanprogress.org/issues/education/report/2013/02/07/52071/investing-in-our-children/ – touches on this and makes some recommendations that might help improve the connection between the systems.

I personally love the idea of tying federal match funding to a robust Quality Rating Improvement System!

A recent pilot program – STEPS – took place in the South Bronx over 3 years, beginning in 2009.

The STEPS project was inspired by the questions surrounding the large number of students from low-income areas in NYC who continue to struggle in elementary school, particularly concerned with the students equipped with the solid initial advantages of Head Start who clearly were losing those advantages by the time they reached third grade.

One key finding of the project came from K-3 public school teachers who indicated that, prior to STEPS, they had received almost no assistance, training or tools to develop the skill set needed to understand and address the social-emotional issues that can undermine both individual student and overall classroom progress.

These teachers – several with over 20 years experience teaching in elementary classrooms – stated that – like child development – the field of social-emotional awareness is almost never covered in teacher training programs; and is almost never raised once teachers begin working.

Here is a comment from one second grade teacher who participated in the STEPS pilot:

“Nothing disrupts a class as much as a child having a melt-down. Nothing discourages the other children as much. And nothing makes a teacher more upset. Ask any teacher. But I have to tell you, I’ve been teaching for 24 years and never, not once – not in my own graduate school education, not in any professional development course, not in my supervision at school – did anyone ever give me the understanding, or the language, or the strategies to help me deal with kids’ social-emotional problems, before STEPS came along. It’s like no one wants to acknowledge that these things happen. It’s like it’s something we are all ashamed of. So until now, I’ve coped on my own.”

So basic and so powerful, yet it took until 2012 for someone to uncover this magic ingredient!

This and other related projects should be telling us that quality early intervention is important, and until we start to look carefully at our childhood education system from birth to 18+, we really won’t be creating sustainable and positive models which can improve outcomes for our future workforce.

Strategic investments in R&D programs like STEPS have tremendous potential in the area of human capital formation, and our future ability as a nation to be economically competitive, both domestically and globally, is closely correlated to the investments in strategic systemic change projects we make today.

A Letter to Hon. John Boehner

December 28, 2012

Hon. John Boehner
Office of the Speaker
H-232 The Capitol
Washington, DC 20515

Dear Mr. Boehner:

I’ve been following the saga of ‘the fiscal cliff’ since the end of summer 2012.

It was made very clear to us outside the Beltway (commonly known as citizens, voters and taxpayers) that our elected officials in Congress would take no action until after the November elections.

As disappointing as that news was, it seemed reasonable and appropriate to many of us on the outside to expect that our elected officials would do some talking behind the scenes in preparation for a call to action after the election at which time our elected officials would work together in the best interest of the overall U.S. economy — business, commerce, education and the citizens of the United States.

Now – several months later and just a few days from the ‘tipping point’ a.k.a the ‘fiscal cliff’– we seem to have a continuation of the petty, partisan and puerile drama that has come to categorize our Congress following the national elections of 2010.

November 2010 marked the point in time when a number of conservative tea party candidates were elected to the House of Representatives. The infusion of passionate but neophyte tea party representatives — all of whom signed the Grover Norquist Pledge — precipitated your election as Speaker in January 2011, which coincidently seems to mark the beginning of extreme dysfunction in our nation’s capital.

I have listened to you and some of the ‘young rascals’ who were elected in 2010 under the tea party platform.

When I listen, I hear some really great sound bites, focused almost entirely on the federal government.

There is no one I’ve met who wouldn’t like to see smaller government and reduced government spending — sweetened by the magic elixir of reduced taxes.

The real problem seems to be: Government (as we see and interact with it from outside the Beltway) includes federal, state, county, local, schools and a vast number of entities which operate in the public sector as ‘quasi-government’ agencies.

As a citizen, voter and taxpayer in the U.S., I know I pay: federal income taxes; federal excise taxes; state income taxes; state sales taxes; county property taxes; county sales taxes; city property taxes; city sales taxes; city sewer taxes; city library taxes; and property taxes levied by my local school district. I can quantify the majority of those taxes: what I can’t quantify is the amount of other government and quasi-government fees and taxes I pay daily, weekly monthly or annually: highway and bridge tolls, parking fees, hotel occupancy fees, motor vehicle fees, MTA fees, license fees, daily use fees, and park access fees, most of which are invisible to me.

You and the ‘young rascals’ have some great rhetoric: What I don’t hear from you and your tea party cabal is dialogue, discussion, research or new ideas about re-engineering our overall government in the U.S. for enhanced efficiency and longer term sustainability.

Mr. Boehner: With your intractable and rigid focus on cutting spending at the margins and continued tax breaks for the ultra-rich, I think you and your tea party followers may be threatening the very essence of the United States and our economy as a going concern.

That thought leads me to believe that you and some (or all) of your tea party cabal may be guilty of treason because your actions are diametrically opposed to the best interests of my fellow citizens, voters and taxpayer of the United States of America.

It is my hope, Mr. Boehner, that come Monday, December 31, 2012, you and your followers will move away from treason to align with the majority of American citizens, businesses and American society to ensure a rational, sensible and sustainable solution to the ‘fiscal cliff’ dilemma which currently threatens our country.

Thank you in advance for considering my opinions, and hopefully, for adjusting your posture to a more inclusive and mainstream position.

Sincerly,

The Walrus
Mount Vernon, NY 10552

Job Creators?

November 21, 2012

Over the past 18 months, or so, we’ve been deluged with propaganda about “Job Creators” – mostly referring to private equity firms which are prone to swoop in, acquire companies which are ‘undervalued’ and turn them around for a healthy profit (to the private equity partners).

Some years ago, I recall taking an economics course which was anchored around some research conducted by noted M.I.T. economist Lester Thurow which he categorized as “The Zero-Sum Society”.

Thurow had examined a number of scenarios where costs and revenues were shifted between various public sector entities.  One entity would reduce taxes while moving services to another entity.  The service-receiving entity raised taxes to fund the shifted services.  The ultimate result:  a zero-sum outcome to taxpayers.

Today’s news that Hostess Brands – which was acquired out of bankruptcy by the private equity firm Ripplewood Holdings in 2009 – has received approval by the U.S. Bankruptcy Court for the Southern District of New York “for the orderly wind-down of its business and sale of its assets” is certainly not good news for the 18,500 Hostess employees who will soon be unemployed.

All in all, the ‘ripple effect’ of the Hostess Brands bankruptcy will be the closing of 33 bakeries, 565 distribution centers, 5,500 delivery routes, 570 bakery outlet stores, in addition to the loss of those 18,500 jobs.

This is just another example of Thurow’s Zero-Sum Game.  No value added, just a shift of wealth from one group or place to another.

In fairness, Ripplewood enjoys a pretty good reputation among its peers in the private equity sector – where the term ‘vulture capital’ seems to be growing in popularity.

Of course, Ripplewood’s goals generally mirror those of other similar firms:  Buy distressed companies at a fire-sale price; fix the problems; and sell the repurposed firm at a nice profit.

Over its 17 year history, Ripplewood has had some major winners, and it is no stranger to losers, or to the U.S. Bankruptcy Court for the Southern District of New York.

In March 2007, a U.S. investor group led by Ripplewood Holdings acquired Reader’s Digest Association out of bankruptcy for $2.8 Billion, including the assumption of debt.  When the dust settled, the equity investment was $600 Million, leveraged against debt of $2.2 Billion.

In August 2009, just 2 years after the Ripplewood acquisition of Reader’s Digest, the U.S. Bankruptcy Court for the Southern District of New York approved a “new & improved” voluntary bankruptcy of Reader’s Digest which reduced its debt of $2.2 Billion to $550 Million, and erased the entire equity investment from the private equity consortium.

The good news which emerged from the Reader’s Digest saga was that the company was able to continue operations, and effectively, no jobs were lost.

Back to November 2012:  Ripplewood’s initial strategy in the Hostess acquisition revolved around seeking major concessions from the unions which represent the majority of the workforce.

For the most part, Ripplewood did act like a responsible “gentle private equity investor”.

Despite the apparent odds against a rescue and turn around, Ripplewood continued to invest in Hostess to keep it going.  Ripplewood didn’t extract outrageous dividends or lay on more debt, beyond the 80% leverage they saddled the company with initially.

In the first year, at least, Ripplewood charged Hostess some management and consulting fees, although not obscene, generally thought to have been in the millions of dollars.

Observers contend that one of Ripplewood’s major blunders in their turnaround strategy with Hostess was to increase management compensation while it was seeking to constrain overall employee compensation and benefits. The Union representing the majority of Hostess employees zeroed in on huge increases in executive compensation (i.e. CEO went from $750,000 to $2,550,000) while the company was playing hardball with the union seeking major concessions, particularly in the area of pension and benefits.

All things considered, the timing of Ripplewood’s acquisition possibly was the final straw.  In 2009, we were in the midst of one of the worst recessions in U.S. history; commodity costs were very volatile; competitors with lower fixed and variable costs were consolidating; and Hostess was highly impacted by the cumulative effects of collective bargaining agreements.

At the end of the day, Hostess employees will lose their jobs; communities where Hostess facilities are located will lose both tax revenue and the multiplier effect of employee spending; equity will be destroyed; debt will be written down; unsecured creditors will be left holding the bag; but someone will profit significantly from the sale of the Hostess brand to a new private equity fund.

If mapped out very carefully, the effects of the zero-sum game generally look very much like the effects which resulted from the collective works of Robin Hood or Blackbeard the Pirate:  A zero value-added, zero-sum game where some get the spoils, some are left destitute.

Job creators?  Not so much…..