In Cincinnati News: October 12, 2015

Macy's Inc.

C4AD again shares local stories that recently caught our interest:  

  • The business of Cincinnati-based Macy’s Inc. is being put at risk by activist shareholders intent on short-term gains.
  • Trends in rentals and homeownership rates in the local housing market are harsh on low-income people.
  • Mayor John Cranley launches another anti-poverty initiative, this one aimed at children, but not everyone is pleased.
  • The Enquirer editorial board is spot on in describing how institutional discrimination, largely invisible to most, shackles the American Dream for many.
  • The editorial board also gave compelling reasons for recommending a ‘no’ vote on ResponsibleOhio’s Issue 3 to legalize marijuana in the state. 
  • Finally, Governor Kasich’s decisions on federal food aid appear to discriminate against Hamilton County and other urban areas in the state.

Investors Risk ‘Hollowing Out’ Macy’s Business For ‘Fast Gains’

Since July, activist investor Starboard Value LP, which owns a minority stake in Cincinnati-based Macy’s Inc., has pressured the company to sell its real estate holdings and lease the properties back at fair market rents.

Local press has covered the story (for example, Enquirer stories here and here and here and here, and a Cincinnati Business Courier story here), but it has failed to highlight the short-term windfall for shareholders and the downside risk for Macy’s, its employees, and the Cincinnati region. Fortunately, national media filled most of these gaps in local reporting.

The Wall Street Journal commented, “Investors always prefer a higher multiple, of course, and will consider many levers to make it happen. In this case, though, they risk hollowing out the actual business of Macy’s—retail—for the sake of fast gains.”

A Business Insider article reported reported, “Macy’s management believes that pursuing a sale-leaseback strategy in which it would sell its retail space and then rent it back would burden it with significant lease expenses that would erode its profitability and weaken its finances, according to three of the sources.”

The New York Times calls Starboard Value “one of the most prominent activist investors of the past four years,” noting that in 2014, in a dispute over a real estate sale-leaseback strategy, “the firm managed to oust the entire board of Darden Restaurants, the parent of Olive Garden, a feat that relatively few of its peers can claim.”

“Value extraction” rather than “value creation” is increasingly the norm for investors espousing the “shareholder value” philosophy, according to this 2014 article of the year in the Harvard Business Review, which was also covered by C4AD here.

Rising Rents Hit Low-Income Residents Hardest

The Enquirer reported on rising rents in the Cincinnati area, where between 29 percent and 34 percent of the population, more than 600,000 people, live in rental units. The article tells the story of Iris Jennings, a mother of three, who pays $550 per month—44 percent of her monthly salary—for a two-bedroom apartment on Glenway Avenue.

Poinciana Apartments, Reading Road, Cincinnati. (Photo courtesy of Ohio Redevelopment Services Agency.)
Poinciana Apartments, Reading Road, Cincinnati. (Photo courtesy of Ohio Redevelopment Services Agency.)

When households spend more than 30 percent of their income on rent, they’re forced to cut back on other basic needs, such as food, transportation, and health care, according to a study by the Joint Center for Housing Studies at Harvard University, The State of the Nation’s Housing, which the article cites.

Poverty, we are reminded, is not only about education, job opportunities, and wages, but also about the affordability and availability of necessities such as housing, transportation, food, childcare, etc.

More Residents Are Renters

Home foreclosures have pushed more people into the rental market, according to a related Enquirer story. Home ownership declined between 2010 and 2014, from 60.9 percent to 56.5 percent in Hamilton County, and from 42.4 percent to 35.9 percent in Cincinnati.

Mayor Cranley’s Anti-Poverty Plans

Mayor John Cranley. (Photo courtesy of the City of Cincinnati.)
Mayor John Cranley. (Photo courtesy of the City of Cincinnati.)

Mayor Cranley, in his State of the City speech at GABP, announced plans to create a child poverty task force to lift 10,000 children out of poverty in five years. He says the task force was inspired by his own Hand Up Initiative and by the Urban League’s State of Black Cincinnati report. Cranley, who would also sit on the task force, says “actionable recommendations” would be released by June 30, 2016.

An Enquirer analysis indicated the depth of the city’s childhood poverty problem: “If child poverty in Cincinnati fell by 10,000 kids, (it would go) from 27,000 to 17,000 — a 37 percent drop. That means Cincinnati would have fewer poor children than Cleveland, Detroit or Dayton, but it would still be six points worse than the national rate. (Currently, the city is 21 points worse than the national rate.)”

Yvette Simpson, a member of the Cincinnati City Council, countered in an editorial that the goal of the task for is “short-sighted” given that “the city’s mobility rate is 5.1 percent (in a generation).” “This announcement is even more puzzling,” she said, “considering the mayor and the administration’s attempt to derail Council’s unanimous decision to increase human services funding in this year’s budget.”

The Hand Up Initiative, said the mayor, “invests in best-of-class job training and job readiness programs like Cincinnati Works, the Urban League, SOAR, and Cincinnati Cooks. It is working and is on pace to reduce poverty by 5 percent over 4 years.” In July, the Enquirer reported on a group of graduates from the Urban League’s CORE program.

CityBeat reported that Councilman Chris Seelbach and Michelle Dillingham, CEO of Community Shares, are critical of the funding the Hand Up Initiative, budgeted at about $2.3 million per year, alleging that about $1 million of the initiative’s funds came from other anti-poverty programs.

Discrimination Shackles American Dream

“It is a pervasive illusion that everyone gets a fair shot at the American Dream,” wrote the Enquirer editorial board on Sept. 29.

Fifth Third Bank headquarters building in Cincinnati.
Fifth Third Bank headquarters building in Cincinnati.

“For many, discrimination at an institutional level shackles the pursuit of the Dream. Such discrimination is so big it is often invisible unless you suffer from its effects.”

The editorial board was writing about the lending practices of Cincinnati-based Fifth Third Bank that discriminated against African-American and Hispanic borrowers and the discriminatory contracting practices of the City of Cincinnati.

Three cheers to the editorial board.

Reject Issue 3. Promoters will benefit. Ohio won’t.

‘The ballot measure comes dressed in the trappings of the benefits of legalizing marijuana, and it is certainly an audacious proposal. But its promoters’ display of benevolent inventiveness is self-serving,” wrote the Enquirer editorial board on Oct. 3

Cannabis sativa aka marijuana.
Cannabis sativa aka marijuana.

The editorial rightly sees the measure’s greatest flaw: “It doesn’t put the public first.” Rather it awards the most valuable economic right in a new industry to a small group of investors and “shields their rich reward by constitutionally enshrining their right to the market and fixing in place the tax rate they would pay.”

Three more cheers to the editorial board.

Kasich Policy Prompts Civil Rights Complaint

The Kasich administration continues to extend federal food aid for rural counties, but not urban areas, even though most people eligible for food aid live in urban counties, according to a report and recent post by Policy Matters Ohio. The administration’s decision prompted state and national press coverage and a civil rights complaint filed in August 2014.

by Mike Brown, mbrown.c4ad@gmail.com

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