The Banks, CEI, and MUNY

MUNY, the city-owned electric utility, became a political bone of contention in the struggle to resolve Cleveland's fiscal crisis. Cleveland's community relations and economic condition suffered as a result, particularly when Kucinich refused to honor the Perk administration's tax abatement to banks and businesses to build office towers.

Cleveland chose to create its own power system in 1905 rather than rely on existing private systems (the more common approach). MUNY—which provided relatively cheap electricity to 20 percent of the city's residents and to all municipal buildings and streets—had competed with Cleveland Electric Illuminating Company (CEI), a private utility, ever since. The demand for MUNY power had always exceeded capacity (especially during peak hours), forcing MUNY to purchase power from CEI or from utilities outside CEI's customer area. The situation worsened over the years as demand grew and MUNY's operating plants deteriorated. The public utility's decline owed much to CEI's interference, particularly in lobbying the city council not to maintain MUNY facilities (Bartimole 1977). Whichever option MUNY chose for obtaining more power (and it eventually bought all of its electricity from outside sources), an interconnection with CEI was critical because of the prohibitive cost and logistical difficulties of constructing separate transmission lines.

Although CEI could not legally deny MUNY's request for interconnection, its response was a more important factor than the

city's inefficient expenditure policies in producing Cleveland's cash flow shortage. After years of contentious negotiations CEI formed an interconnection but often provided inadequate power, causing regular power outages. The Nuclear Regulatory Commission accused CEI of failing to restore electricity immediately after such interruptions and of sending inadequate work crews for repairs and restorations (Bartimole 1977). The continuing problems tarnished MUNY's reputation as an efficient, reliable power system. "CEI took advantage [of this situation] . . . through its aggressive campaign to take customers away from MUNY." When the campaign failed, CEI sought to eliminate the public utility by purchasing it outright. In response Cleveland filed an anti-trust suit against CEI and other regional utilities in 1975 (U.S. Congress, House 1979b, 205). Cleveland lost that suit and had to pay its overdue bills to CEI in full. These bills mounted under the Perk administration, which left the debt unpaid. This debt was the primary cause of the city's serious cash flow shortage.

Proponents of the sale of MUNY to CEI, particularly the Greater Cleveland Growth Association, cited the public utility's decaying physical plant and the perception that MUNY represented a financial liability for Cleveland (U.S. Congress, House 1979b, 208). GCGA's position was not surprising: CEI helped create the association in 1962 (Clavel 1986, 61). Kucinich ardently opposed the sale of MUNY or any other city assets to balance the budget and countered the GCGA's analysis of MUNY as a fiscal drain:

The operation of MUNY has been stabilized. It is no longer draining the city treasury. In fact, with the MUNY Light debt [to CEI] paid off, we can expect MUNY to earn several million dollars a year for the city, as well as continuing to furnish us with low-cost street lighting, which saves Cleveland's taxpayers hundreds of thousands of dollars yearly. (U.S. Congress, House 1979b, 209)

The American Public Power Association, a trade association of public utilities, corroborated Kucinich's analysis and joined the mayor in opposing the sale of MUNY, arguing that the benefit to the public of MUNY's cheaper rates should not be dismissed lightly (U.S. Congress, House 1979b, 209).

The battle to preserve MUNY became a rallying point in what is often described as Cleveland's class war (Branfman 1979, 43).

Kucinich and his working-class followers fought to maintain the publicly owned utility. The business and banking communities tried to force the sale of MUNY to CEI, which would then have a monopoly on Cleveland's electricity. Indeed, Kucinich went before Congress and charged the banking community with deliberately throwing the city into default to aid its business allies by making the sale of MUNY to CEI a precondition for the renewal of Cleveland's loans (U.S. Congress, House 1979c, 5–13). Kucinich charged that "the decisions of the banks concerning extension of credit to the city [were] . . . influenced by massive conflicts between the banks' loan-making functions and their direct and indirect ties to other interests in the Cleveland area" (U.S. Congress, House 1979b, 1). Kucinich specifically named M. Brock Weir of Cleveland Trust, the dominant bank in Cleveland and Ohio's biggest bank (with assets of $4 billion).

The renewal of notes had been predicated by Cleveland Trust on the sale of the city's publicly-owned electric system—MUNY. . . . The Mayor also charged that Cleveland Trust had innumerable links to the neighboring private utility company—Cleveland Electric Illuminating Co.—and that denial of credit was leverage exerted by the bank to force sale of the publicly-owned system to CEI, an admitted long-standing corporate goal of the private utility. (U.S. Congress, House 1979b, 2–3)

Why would Cleveland's banking community be interested in the demise of MUNY? Because of their enormous investments in CEI, it was in the banks' collective interest to eliminate any cost competition for the private utility. Congressional investigations uncovered strong links between the city's six major banks (all of which were involved in Cleveland's lending consortium) and CEI.^[2] These relations were based on loans and lines of credit to CEI, shares of CEI stock that the banks held in trust and pension accounts, stockholders' voting rights, corporate interlocks between CEI and the banks (including direct representation of the banks on CEI's board), the banks' management of CEI pension funds, and major CEI deposits at the banks (see Table 10). For example, four of the six banks provided CEI with a total of $74 million in lines of

credit, and the two largest banks (CTC and National City) together provided $79 million in loans to the utility between 1974 and 1978 (U.S. Congress, House 1979b, 372–374).

CEI kept compensating balances at four of the six banks totaling almost $2.8 million. Five of the six banks held almost 1.8 million shares in CEI (Capital National Bank did not provide figures), including more than 2 million with voting rights (U.S. Congress, House 1979b, 375, 50). Cleveland Trust and National City together held almost 4.5 percent of CEI's stock and 2.9 percent of the voting stock (U.S. Congress, House 1979a, 46; 1979b, 47). These same six banks shared 205 corporate interlocks with CEI and had 10 representatives sitting on CEI's board (U.S. Congress, House 1979b, 183). Cleveland Trust alone managed $70 million of the $130 million in CEI pension funds managed by banks (U.S. Congress, House 1979c, 10). In addition to these sources of direct common interest between the banking community and CEI, there were indirect connections between them through the law firms representing the defendants in Cleveland's anti-trust suit against CEI:

The firm representing CEI is Squire, Sanders and Dempsey, a major law firm in Cleveland with 78 members and 95 associates. One of the Cleveland partners is Ralph Besse, former chairman of CEI and an advisory director of Cleveland Trust Company. Squire, Sanders and Dempsey also has a partner sitting on the board of Central National Bank and another on CEI's board. Representing Toledo Edison in the case was Jones, Day, Reavis and Pogue. That firm has 60 members and 58 associates in Cleveland and 63 members and associates in its Washington office. Partners of Jones, Day, Reavis and Pogue sit on the boards of Central National Bank, National City Bank, and Cleveland Trust Company. Contributions to campaign committees supporting the recall of Mayor Kucinich in August 1978 included 8 Jones, Day, Reavis and Pogue members and 53 Squire, Sanders and Dempsey members. (U.S. Congress, House 1979b, 207)

Together these structural arrangements unified CEI and Cleveland's banking community in their struggle to force the city to sell MUNY.

Ratcliff, Gallagher, and Ratcliff (1979) note that interlocks between banks and regional nonfinancials tend to diminish the finance capital available to the local community. Because banks give lending priority to their interlocked corporations, they deprive the local area of residential mortgage capital. That capital is key to ur-

ban development; without it urban decline, decreased property values, and lost revenue are nearly inevitable. Cleveland suffered these problems because of disinvestment and redlining (U.S. Congress, Senate 1975; 1980). Disinvestment in the municipality contrasts sharply with the banks' investments in and interlocks with CEI and other capital accumulation interests in Cleveland.

O'Connor (1973) suggests that banks influence municipal policy making by refusing to extend loans for activities that compete with private capital accumulation. Since MUNY competed with CEI and other investor-owned utilities, it is not surprising that the banks pressured Kucinich to sell MUNY to CEI. More important, the investor-owned utilities around Cleveland were interested in investing in nuclear power generation. CEI wanted to absorb MUNY to expand its rate base and thus raise the revenues necessary for constructing a nuclear power plant.

CEI had other reasons for wanting to eliminate its competitor. Because MUNY, as a public utility, did not have to produce profits or pay dividends, it could charge lower rates than an investor-owned utility like CEI. The sale of MUNY to CEI would enable the investor-owned utility to charge even higher rates because of the loss of competition. Evidence from other cities indicates that rates rise sharply when investor-owned utilities buy up their municipally owned competitors. In Fort Wayne, Indiana, for example, the private utility's electric rates doubled after the 1974 sale of the public utility (see Marschall 1979, 114).

Why would the banks have any interest in such matters? The bonds of investor-owned utilities are guaranteed as if the utilities were state agencies. The rates a utility charges are guaranteed indirectly and sometimes directly. Indirectly, the precedent set by Smyth v. Ames (1898) guarantees a "reasonable return" on capital "used and useful in the public's service" (Bonbright and Means 1969, 63; see also Metcalf and Reinemer 1967, 21–23; Bonbright 1972). The Supreme Court ruled in Smyth v. Ames that rates could not be set so low that they forced a private utility into bankruptcy. But failing to pay a bond would force bankruptcy, because the utility's board would otherwise have a sure form of leverage on public service commissions to achieve the rates they desired. The notion of a reasonable rate of return "quickly became a de facto guarantee of income, sufficient to cover operating costs of fixed and vari-

able capital plus debt service and profits" (McGuire 1986, 258).

In other cases, state guarantees of a bond can be applied directly to secure sufficient capital and bond sales in periods of crisis or to fund joint utility-state projects. The bonds are usually tax free (Metcalf and Reinemer 1967; Wasserman 1979; Hertsgaard 1983). Banks then get a guaranteed return on these bonds, with the support of the state, at rates routinely 2–3 percent above those of state-issued bonds (McGuire 1986). Significantly, the total capital costs of the utility industry rose more than 600 percent between 1969 and 1979 (Munson 1979, 349). That represents a major increase in the bond market precisely when other industries were undergoing depression and recession. No wonder banks had an interest in nuclear-power investments: the costs were passed on to consumers and guaranteed by the state.

In addition to the evidence of common interests among the banks, CEI, and the business community, there was a political bone of contention between Kucinich and National City Bank, a member of Cleveland's six-member lending consortium and holder of $4 million of the city's notes. The previous mayor had given National City a $14 million tax abatement to support the construction of a new building for the bank, a move Kucinich "vehemently opposed." Frustrated by their failure to unseat Kucinich in a recall election, the banks apparently pursued default as their next strategy. As National City's chairman, Claude MacClary Blair, put it: "Default, with all its problems, might be the best thing that could happen to Cleveland if it meant the defeat of Dennis Kucinich" (U.S. Congress, House 1979b, 830).

Furthermore, Cleveland Trust's M. Brock Weir pointedly avowed that the city's fiscal difficulties were really not of grave concern to the banks. "The business climate remains healthy," Weir said. "The only problem is the little canker downtown." So although the banks could easily have rolled over Cleveland's loans (the standard operating procedure in similar instances of impending municipal default), the banks and the business community preferred to construct a political climate favorable to the destruction of MUNY as a cost competitor with CEI and to the provision of tax breaks for the banks. According to Weir, "We [the banks] had been kicked in the teeth for six months. On December 15 [1978], we decided to kick back." The congressional investigation report

noted, "Clearly the default of the city and the possibility of a forced sale of MUNY would have been a severe kick in the teeth for the Kucinich Administration" (U.S. Congress, House 1979b, 830, 829).

In addition to the banks' efforts, GCGA's taxation committee had been urging the sale of MUNY since 1977. GCGA's position is understandable in the light of a congressional investigation that uncovered strong relations between GCGA, the banking community, and CEI (see Table 11). For example, GCGA's chairman and three of the nine vicechairs were officers or directors of banks involved in Cleveland's default. Of GCGA's twenty-five-member executive committee, nine were officers or directors of banks and two were officers or directors of CEI. Of GCGA's fifty-one-member board of directors, ten were officers or directors of banks and two were officers or directors of CEI. Moreover, five of GCGA's ten-member ex officio executive committee were officers or directors of banks (U.S. Congress, House 1979b, 211–213).

The strong presence of bank representatives at GCGA is all the more significant because the association knew as early as 1975 that Cleveland's budget and accounting books did not accurately assess the city's fiscal condition. A GCGA report recommended that Cleveland refrain from relying on short-term notes and attempt instead to raise operating revenues from the sale of city assets (U.S. Congress, House 1979b, 214). Yet the banks continued to lend short-term money to Cleveland until 1978 without demanding greater accountability or improved ledger management. Apparently motivated by CEI's major interest in forcing the sale of MUNY, the banks' easy lending policy and tolerance of the city's fiscal mismanagement placed the city at their mercy three years after the association's report. Kucinich repeatedly charged that Cleveland Trust insisted on the sale of MUNY as a precondition for renewing Cleveland's loans and rescuing the city from default.

Faced with Cleveland's deteriorating economic prospects, Kucinich offered to put the MUNY sale issue on a referendum ballot. Part of that proposal also called for an increase in the city income tax from 1 to 1.5 percent. After much battling, the city council approved Kucinich's referendum proposal. When the referendum came to election, voters agreed to raise the city's income tax by 50

percent but rejected the sale of the public utility (New York Times , 20 Dec. 1978, 16; 23 Dec. 1978, 1; 28 Feb. 1979, 1).