On Maine Web News, Candidates Discuss The Maine Public Empoyees Retirement System but avoid the Constitutional Mandate.

Maine Web News- The Candidates Discuss MPERS


Lepage promises to honor promises to state employees pension funds and suggests changing the system for future employees. Lepage says he will have to talk to the legislature, but does not explain why- which is because contractual terms of agreement have been embedded into the Maine State constitution since 1997. For a candidate who is running on a platform that includes respecting the constitution, I find this failure to mention the constitutional mandate which clearly impacts the unfunded liability problem disappointing.


Both Kevin Scott and Moody articulate the solution better than LePage, who suggest the same ideas, but not as forcefully. All agree that the problem must be "isolated" to quote Kevin Scott, meaning that future employees must be hired on a different set of terms. Moody addresses the issue of risky investment choices made by the managers of the MPERS fund more forcefully than the others and he brings up a crucial point that others failed to mention - The contractual agreement with the Maine Public Employees System, which is embedded into the Maine State constitution makes all business investments in Maine very risky. There is an element of uncertainty, affecting potential business investments, as to how the constitutional mandate may be enforced in the future- and so it is arguable that both the creation of the MPERS investment fund, through special act of legislation, and the constitutionalizing of that fund's contractual  agreement have created the need for further government chartered investment corporations- all of which use tax payer dollars to give government chartered investment companies the edge over the private sector.


Like MPERS, the Small Enterprise Growth Fund was chartered by a special act of legislation with these words; "this is an essential government function" Is it? This is the question that LeBlanc should have asked but instead the problem of the unfunded liabilities created by the MPERS investment fund was discussed as though there were no relationship to The Maine State constitution (Article IX General Provisions, Sectio 18-18-B). How can we return to the premise of our constitution when we ignore the Maine State constitution in our collective dialogue? As new media, LeBlanc can lead the way in recognizing the big gorilla in the works.


Early in 2010, the legislature added another government chartered investment corporation to it's portfolio with yet another the special act of legislation chartering yet another capital investment company. LD1, bears the title "An Act To Stimulate Capital Investment for Innovative Businesses in Maine" although the legislation prohibits investing in individual businesses and mandates investing in mutual funds. LD1 requires that the mutual funds give "strong consideration" to investing in  this state.....and  "Will maintain at least a periodic presence in the State".




LD1 or "The Fund of Funds" cites The MPERS investment fund as it's preferred "lender" (meaning investor). I has been sold as a benevolent act by the Maine legislature to relieve the Maine people of their unfunded liability to MPERS. However MPERS does not mention LD1 in it's recent news letter. Perhaps because, with the taxpayers signed up as the risk bail out fund for "The Fund of Funds", the investment strategy of that fund is too risky, even for MPERS, which also relies on the Maine state taxpayer as a bail out fund. neither government chartered investment company provides the Maine state taxpayer a profit share. The justification for using the Maine taxpayer as a bail out fund appears to be simply that our government is "creating jobs",- in the chosen sectors that serve the government's design to transform Maine into a better place- at least according to our government's approved network 
 
The favored economic sectors are mandated in the newly chartered mutual funds investment corporation.
 
They are:
 

49-J. Targeted technologies. "Targeted technologies" means biotechnology, aquaculture and marine technology, composite materials technology, environmental technology, advanced technologies for forestry and agriculture, information technology and precision manufacturing technology.

Once again the legislature clearly identifies the special interests which will be the beneficiaries of the special act of legislation chartering "The Fund of Funds".


Article IV Part Third , Section 14 is quoted at the top of this blog.

According to The Maine State Constitution- A Reference Guide by Marshall J. Tinkle “Special or private laws relate to particular persons or things or operate on a selected class rather than on the public generally”

MPERS is a special class of persons - NOT the public generally.The targeted technologies which are being advanced by Maine's network of government managed economy is a special class of things.


LD1 also identifies the government network as those that are favored by this legislation when it includes the following in "Investment goals and guidelines"

B. Will build linkages to, and accept referrals from, at least some of the organizations promoting the State's innovation economy, including the authority, the Maine Technology Institute under Title 5, section 15302, the Small Enterprise Growth Fund under section 383, the Department of Economic and Community Development, the Maine Patent Program under section 1921, the University of Maine System and other venture capital investors within the State;

The guidelines also include:

E. Demonstrates the ability to make successful venture capital investments.

So what happens if the investment fund instead demonstrates it's ability to successfully lose large sums of capital?


That is why they included the taxpayer as bail out fund in the special act of legislation chartering a mutual funds investment corporation to benefit special classes of people, and special industries and to work with a special network of agencies.

To Profit- Or not to Profit? What the Heck- Why not Both!?!

It has come to my attention, through that grapevine known as "the internet", that under discussion in the Maine state legislature is the creation  of a legal business entity that is a hybrid between the non-profit and "low profit" organizations. I have not yet been able to locate any specifics about the bill as it would stand in Maine. In North Carolina, it includes small manufacturers, but the usual definition of an LC3 is just a manipulation of the non-profit category so that investors can make a profit.

Here is a defintion from The Non-Profit Law Blog

"The low-profit, limited liability company, or L3C, is a hybrid of a nonprofit and for-profit organization. More specifically, it is a new type of limited liability company (LLC) designed to attract private investments and philanthropic capital in ventures designed to provide a social benefit. Unlike a standard LLC, the L3C has an explicit primary charitable mission and only a secondary profit concern. But unlike a charity, the L3C is free to distribute the profits, after taxes, to owners or investors. "

I do not know if  the investor retains a tax benefit for "donating" money to a non-profit organization, and if so, if that would be before or after paying taxes on his profit. The language used in defining the hybrid is "low profit" organizations- with "low profit" as yet undefined. I will be interested to see if "low profit" is defined in the legislation, should it come to pass.

Burton A Weisbrod is an economist who has written in length about the non-profit sector and it's relationship to the government sector and the private economy sector. The problems of the nonprofits already hybrid capitalization will not go away if the legislature creates a new legal hybrid.

This is the blurb from "To Profit or Not to Profit " Edited by  Burton A Weisbrod

Nonprofit organizations are changing dramatically in the ways they are financed. They are becoming increasingly commercial, operating more like private firms. Far more is involved than the generation of revenue. As donations decline in importance and user fees and money-raising ancillary activities come to dominate, they bring side-effects on the social missions that justify public support. This book examines these little-recognized relationships for the overall nonprofit charitable sector and then focuses on each of six industries; important differences are found among hospitals, universities, social service providers, zoos, museums, and public broadcasting."

"

Socializing the Risk and Privatising the Gain

Introduction: Below is a post formerly published on the former Augusta Insider. It concerns relatively recent Maine Legislation . The summary in the legislation states "This bill is modeled on statutes in Arkansas, Iowa, Michigan, Montana and Utah. It authorizes the establishment of the Maine Fund of Funds within the Small Enterprise Growth Board for the purpose of increasing the availability of venture capital to the Maine economy. "

The legislation does not provide the specific statutes of the states that are used as a model for this investment scheme. I looked up the constitutions of Iowa and Arkansas to see what their statutes say about the creation of corporations. Iowa's constitution is very strict about prohibiting the creation of corporations by special acts of legislation, while Arkansas's allows for more latitude than the Maine State constitution. There are several states that use the same language prohibiting the formation of corporations by special acts of legislation. During the period from the American Revolutionary War to 1875 when Article IV, Part Third, Section 14 was added to the Maine State Constitution, Americans were very involved in their constitutions. There were many compilations of state constitutions published during that time, some of them organized by subject. A quater of a century, prior to the inclusion of Article IV, Part Third, Section 14, The Communist Manifesto was published , which targeted The United States of America as the enemy. The Communist Manifesto also targeted "capitalism" by which was meant "private capitalism" and the solution of course was "state capitalism" a system in which the flow of capital is owned and/or controlled by the state.

Then, as now, the states all look toward what the other states are doing.

Socializing the Risk and Privatizing the Gain


I recently wrote about two pending legislative bills, LD1 and LD166.

LD1666 grants tax credits to venture capitalists and non-profit organizations, regardless of their status as taxpayers. The appropriations committee declined LD1666, but that is of little consequence since the ability to provide tax credits to venture capitalists and non-profit organizations is granted by the latitude extended in LD1 The bill allows for loans procured by the newly created “Fund of Funds” to be secured by “tax credits” but the lenders need not be qualified Maine State taxpayers. LD 1 includes an assertion that the tax credit used to secure the loans is not a security but fails to provide substantiation for that claim. Given our lawmakers level of awareness of the Maine State Constitution, is it justified to accept their claims about whether the “tax credit” is, or is not, a “security” without any further input from outside opinions?

The legislation repeatedly inter-mixes the words “security” and “tax credit” in the definition of other terms

5. Lender. "Lender" means an entity that lends capital to the fund in exchange for a return on the lender's investment that conforms to the conditions of certificates issued as security for the debt.


2. Certificate. "Certificate" means a document executed by the board extending the State's guarantee to a lender by means of a refundable tax credit.


6. Refundable tax credit. "Refundable tax credit" means the credit authorized by Title 36, section 5219-DD that the State shall redeem for cash if the holder has no tax liability against which to apply the credit. A refundable tax credit may be owned and redeemed by the system. (Title 36,section 5219-DD is a credit applicable to dentists practicing in underserved areas. It is perplexing how the same statute is transposed to the venture capitalist investor, who, by the parameters stated in the legislation can invests anywhere in the world using the Fund of Funds as a conduit. The tax credit issued to dentists is not refundable)


§ 399. Refundable tax credits The board may issue to one or more lenders certificates for up to $80,000,000 in refundable tax credits as provided by Title 36, section 5219-DD (The tax credit in Title 36,section 5219-DD , issued to individual dentists is not to exceed $15,000 )


1. Redemption. Refundable tax credits may be redeemed only as necessary to offset a shortfall in scheduled payments on debt incurred to capitalize the fund. The rate of return, whether fixed or variable, must be determined by a formula stipulated in the certificate used as security. Refundable tax credits may not be redeemed for any default occurring after December 31, 2031. No more than $10,000,000 of refundable tax credits may be redeemed per calendar year.(The credit issued to dentists in Title 36,section 5219-DD, is not refundable. In the declined LD1666, The Tax credit for venture capitalists and non-profit organizations was capped at 60% )


4. Not securities. The refundable tax credits allowed or transferred pursuant to this section are not securities under Title 32, chapter 135. (You can read that definition by clicking on the link and judge for your self )

LD1, now enacted into law, is a far-reaching piece of legislation, expanding outward to partake in the limitless opportunities existing beyond Maine’s borders and backing up investments with tax payers dollars in the form of a guaranteed refundable State of Maine tax credit. The creation of “the Fund of Funds” is arguably in violation of Article IV. -- Part Three. Section 14 of the Maine State Constitution, which states:

Corporations shall be formed under general laws, and shall not be created by special Acts of the Legislature, except for municipal purposes, and in cases where the objects of the corporation cannot otherwise be attained; and, however formed, they shall forever be subject to the general laws of the State (emphasis added)

One need only to measure the rules, regulations, and guidelines presented in this bill against any standard definition of a corporation to judge for one’s self whether the words, “the fund of funds”, used in the legislation are cloaking the reality that the bill is in fact a charter for a new corporation. Even if one could argue exceptions to the rule that prohibits the creation of a corporation, through a special act of legislation, there is no general law in this state that grants corporations the right to back up investments with taxpayer dollars.

LD1 identifies the preferred lender as “the system” and defines the “system”, for the purposes of the legislation as “the Maine Public Employees Retirement System”. It states that the purpose of the “fund of funds” is to make a profit for the lender. It identifies the board as the Small Enterprise Growth Fund and at the same time it loosens the requirements that the funds be invested in the Maine Economy

Were it not for the fact that mutual funds offer no guarantees, LD 1 reads like the creation of a mutual fund by the government and for the government. To confirm this for your self, read LDI side by side with the definition of a Mutual Fund.

Lawmakers and citizens of Maine should be familiar with Article IX, Section 14 of the Maine State Constitution, which begins with the following words:

In the charter creating “The Fund” and “The Fund of Funds”, it is stipulated that the administration costs are to be derived from the funds themselves. In the case of The Small Enterprise growth Fund, there is a 10% taxpayer investment for which any profits derived always roll over to re-invest in the fund. It is fair to speculate as to whether the legislative charter that created The Small Enterprise Growth Fund enables the administration costs to be paid by the taxpayer. If the annual report were publicly accessible one would be able to make a comparison between administration costs and the 10% roll-over tax payer investment. The SEGF website is not a government website, and so it is reasonable to conclude that the SEGF is legally structured as a separate private economy entity.

“The Fund of Funds” does not rely on a 10% investment from the taxpayer. Instead It uses the taxpayer to provide security for that which, by another name, is a mutual fund.

In the words of Elliot Spitzer, former Attorney General of New York, you cannot “socialize the risk and privatize the gain”, but this is exactly what the “Fund of Funds” achieves.

The charter (LD1) creating the “Fund of Funds” extends the reach of The Small Enterprise Growth Fund, while LD 1659 directly applies this expansion to include The Small Enterprise Growth Fund, authorizing it to invest in a “side” fund for which there are no defining parameters. It also permits the side funds to be structured as a “revolving fund”, which is the structure used for taxpayer investments in The Small Enterprise Growth Fund. The charter also permits side funds to be structured as “as a fund in which the investor will have funds drawn and returned over an agreed time period.” in other words to have an “exit strategy” which is a demand placed on “the fund” by the unidentified venture capitalists who account for the other 90% of The Small Enterprise Growth Fund’s resources.
“The Fund” and the “Fund of Funds’ are justified by it’s creators with the end of attracting capitalization for the Maine economy, and focuses special attention on investments in technology. This is an “end justifies the means” validation for the betrayal of sworn oaths to uphold the Maine State and United States constitutions. The founding fathers of the United States Constitution had the wisdom to consider the spectrum of human character in creating a constitutional system of checks and balances. The charter establishing the “Fund of Funds”, at best, assumes that only the best of human character will ever administer this fund, while it leaves the door wide open for exploitation and corruption.
In addition it gives an unfair advantage to government chartered investment corporations competing in the same market as private sector investment corporations. According to Article IV, Part Third, Section 14 of the Maine State Constitution, all corporations are subject to general laws- however they are formed. Where is the general law that allows corporations, in general , to use tax payer dollars to further their own ends- and in the case of  The Maine Public Employees Retirement Fund , to embed contractual agreements in The Maine State Constitution?

We have heard of similar investment strategies in recent history. Iceland, Harvard University and Bernie Maddoff come to mind. Like our lawmakers, the investors in these “financial vehicles” believed in the assured wisdom of their investment strategies.

There are no parameters within the legislative charters that limit the scope of investments outside of the Maine state economy. Given this lack of definition, an investment or lender in China is authorized. Investments in China and third world economies are attractive to high growth investors due to nearly, absent labor rights laws and minimal environmental regulations making it substantially less expensive to do business in those economies than in the United States.

The charter that created the Small Enterprise Growth Fund, included “public good” mandates. The new legislation deregulates the fund from the original parameters and so negates the “public good” used to justify the creation of the SEGF.

Whenever a loan is guaranteed by a refundable tax credit, Maine taxpayers carry the risk, but there are no benefits for the general taxpayer to compensate for their contribution and/or the risk, other than the vaguely defined phrase that it “benefits the economy”- but so do those funds if they are retained by the original creators of underlying wealth through lower taxes and the latter option does not violate our constitution.

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