Throw Them All Out (9 page)

To create such a large residential community in a rural area, you need roads. Wide roads. The Kendall County Board had already approved the construction of an interchange on nearby Glena Road. But someone had to pay for it.

WE BUILD THE SPEAKER OF THE HOUSE A ROAD

Two months after Speaker Hastert purchased his share in the land, the most powerful man in Congress inserted a $207 million earmark into the federal highway bill to begin building on the Prairie Parkway. An earmark is a way for members of Congress to get money for specific, often local projects. In the words of the White House Office of Management and Budget, it's a way that "circumvents otherwise applicable merit-based or competitive allocation processes" to make favored projects happen.
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Apparently not content with just a quarter share of 69 acres, a few months later (May 2, 2005) Hastert and his wife transferred an additional 69 acres of land to the Little Rock Trust. Seven months after that (December 7, 2005), a little more than a year after he made the first Plano land purchase, and with the Prairie Parkway in the works, the land was sold for $4.9 million. Land that had been purchased for $15,000 per acre was now sold for $36,000 a acre—a 140% profit.

According to Hastert's personal financial disclosure, these sales amounted to transactions of between $2 million and $10 million for his personal stake. Not a bad return for a short-term investment.
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You and I as taxpayers helped Hastert become wealthy. Involuntarily, of course.

Imagine for a moment that Hastert was not a member of the political class but instead was a corporate executive or a school superintendent. What would happen if he used corporate or county assets in a way that would personally benefit his real estate holdings? If discovered, he would at a minimum get fired. He might even be sued, or charged with criminal fraud. But what Hastert did as a politician is common among the political class.

Members of Congress have used federal earmarks to enhance the value of their own real estate holdings in several ways: by extending a light rail mass transit line near their property, by expanding an airport, or by cleaning up a nearby shoreline. Federal funds have been used to build roads, beautify land, and upgrade neighborhoods near commercial and residential real estate owned by legislators, substantially increasing values and the net worth of our elected officials, courtesy of taxpayer money. Not only is this legal—by the bizarre standards of the Permanent Political Class—it's also deemed "ethical." Congressional ethics rules simply say that as long as a member can demonstrate that at least one other person will benefit from an earmark, that earmark is in the "public interest." Try out that ethical standard at your job and see how it works for you.

Dennis Hastert represented a rural district in Illinois. The Speaker of the House who followed him, Nancy Pelosi, represents urban San Francisco. Unlike Hastert, Pelosi and her husband have a large stock portfolio. But they also have extensive commercial real estate holdings. And like Hastert, Nancy Pelosi has used federal taxpayer money through earmarks to substantially increase the value of those investments.

For years, Nancy Pelosi has pushed for earmarks to construct and ultimately extend San Francisco's so-called Third Street Light Rail Project. In 2004, she boasted to her constituents that she had secured more than $120 million in federal money for the project. Third Street is one of the most expensive light rail projects ever, costing $660 million for just a six-mile route. The light rail system includes distinctive marquee poles with sculptures and mobiles, and new street lighting. The rail line is designed to generate a green light at every intersection so trains can travel smoothly from station to station, stopping traffic along the way.

Phase I of the project was heavily funded by the Federal Transit Administration's New Starts program. Pelosi helped secure the funding, to the tune of $532 million, to get the project under way, and another $200 million to continue construction and begin planning for phase two of the project. For the initial $532 million, she actually secured "cost-effectiveness exemptions" from the federal government to make the deal possible. In 2008, she got an additional $11.7 million to help finance Phase II, and over the course of three years she set aside $28 million more for it.
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The new transit line serves as a "key infrastructure improvement to help support revitalization of communities along the corridor," in the words of the San Francisco metro authority. Interestingly enough, that happens to include one of Nancy Pelosi's most valuable real estate assets.
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Pelosi and her husband own a four-story office building at 45 Belden Place. The building is worth between $1 million and $5 million, according to their financial disclosure. Paul Pelosi receives a management fee for handling the property (which he is not required to disclose) on top of net rent of between $100,000 and $1 million per year.

Phase II of the Third Street project runs just two blocks from the Pelosis' commercial buildings. Two stops on the line—Chinatown and Union Square/Market Square—are three blocks from the Pelosis' buildings. Why does this matter? Realtors have a name for it: "transit premium." The National Association of Realtors says that high-quality mass transit (like this project) can increase property values by "over 150 percent." A $3 million commercial building can become a $7 million building practically overnight.

According to a study by the association, location is key: you don't want the metro stop to be too close or too far. There's a sweet spot for obtaining the maximum transit premium: two to four blocks away is ideal.
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Another study by two academics found that a light rail system in Santa Clara County, California, boosted commercial real estate values by 120%.
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WE BUILD ANOTHER SPEAKER A LIGHT RAIL SYSTEM

Nancy Pelosi seems to have a history of advancing earmarks that are near her family's commercial real estate. (Actually, Pelosi doesn't like to use the word "earmark." At a 2007 press conference she said, "Why don't we leave here today forgetting the word earmark?" She suggested the phrase "legislative directive" instead.) In 2005, Pelosi pushed for another $20 million earmark, for waterfront redevelopment only two blocks away from the Belden Street property. The earmark was killed in July of that year. The Pelosis increased their financial stake in the property, and the next year Pelosi asked for the earmark again, and this time she succeeded.
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On another occasion she secured $12 million for the beautification of Geary Boulevard in San Francisco, which happens to abut an investment property the Pelosis own on Point Lobos Avenue.

 

Nancy Pelosi is not the only elected official who earmarked a mass transit project that was in close proximity to real estate holdings and apparently profited handsomely from it. Congresswoman Carolyn Maloney represents parts of Queens and Manhattan, including the Upper East Side "silk stocking district." A former member of the New York City Council, Maloney was first elected to Congress in 1992. For many years she was married to an investment banker, Clifton Maloney, until he passed away in 2009.

In 2007, Congresswoman Maloney, together with New York Senators Charles Schumer and Hillary Clinton, secured an earmark of $167 million for a new MTA subway line. In 2009, she helped obtain another $277 million for the project. In 2010, a third earmark, for $197 million, was approved. The long-sought-after Second Avenue subway, running up the East Side of Manhattan, could finally begin construction. It will likely take years to complete, at a cost running well over $10 billion.

Maloney owns a building at 409 East 92nd Street, valued at between $5 million and $25 million. On her personal financial disclosure, she lists it as a "rental property & residence." Plans for the new subway line feature a stop that happens to be three blocks away from her building—again, right in the "sweet spot."

 

Congressman Mike Thompson of California inserted into the 2010 federal budget an earmark to expand a small regional airport in his district.
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Thompson's earmark was for $280,000 to upgrade the Napa Valley, California, airport—specifically, for a "runway 36L glidescope."

As it happens, the Pelosis own a vineyard and home in St. Helena, California, worth between $5 million and $25 million, and another property nearby. They also own a stake in an exclusive resort called Auberge du Soleil in Rutherford, worth between $1 million and $5 million. All of these properties are
north
of the airport, sitting beneath what had been the flight path for planes coming in to land. But with the new glideslope, according to the airport, more planes would be able to approach from the south. The Pelosi properties would be spared from overhead noise.
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Funding for the expansion of the Napa Valley airport by Thompson's earmark is not the only earmark that has benefited Pelosi's personal investments. Also in 2008, an earmark was inserted in the federal highway bill to widen and improve an exit ramp on California's historic Highway 101. That might not strike anyone as unusual, except for the fact that the interchange is
next to
a shopping mall owned by Pelosi and her husband. According to her financial disclosure forms, that mall brings in between $100,000 and $1 million a year in net income.

So why did legislators do Pelosi a favor? She is the most powerful Democrat in the House. If you want to get something done, it needs to go through her.

The earmark game is bipartisan. Republican Senator Judd Gregg of New Hampshire, whose father, Hugh Gregg, served as governor and was long active in the New Hampshire Republican Party, has spent the bulk of his adult life in political office. Judd was first elected to Congress in 1980, elected governor in 1988, and to the U.S. Senate in 1992. A little more than a decade after joining the Senate, he became chairman of the powerful Budget Committee. In a show of bipartisanship, President Obama tried to nominate Gregg to be his secretary of commerce in 2009. Gregg first accepted, then withdrew, deciding instead to stay in the Senate. He retired in 2010.

Judd Gregg had a reputation as a fiscal conservative, but he was always fond of earmarks. He obtained $266 million in research and development money for the University of New Hampshire, for example, and the school generously named its new technology center Gregg Hall.
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While he served as chairman of the powerful Senate Budget Committee, Gregg earmarked some $66 million in taxpayer money to transform Pease Air Force Base in Portsmouth, New Hampshire, into a business park. He managed to secure $24.8 million for a new federal building there, and at least $24.5 million for New Hampshire National Guard projects at the base, including a new fire and crash rescue station. In addition, he garnered almost $9 million for a new wing headquarters, and $8 million to transform the base from military to civilian use, including buying snow-removal equipment and building a parking lot. For good measure, he was able to pull down $475,000 for structures to shield office buildings at the base from airplane and other noises.

Did I mention that Senator Gregg's brother, Cyrus, happened to be the developer of the air base? Or that Senator Gregg himself had invested between $450,000 and $1 million of his own money in what is now called the Pease International Tradeport? Along the way, the senator has collected between $240,000 and $650,000 on his investment. (Curiously, like Hastert, Gregg did not list all of the real estate addresses on his financial disclosure forms.)
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Before he secured the earmarks, Gregg invested through several partnerships, including 222 International Drive, LLP, and Say Pease, LLC. The former, for the development of a commercial building, was valued at around $11 million.
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When President Obama announced then-Senator Gregg as his choice for commerce secretary in 2009, Gregg was asked about the earmarks and how he profited from them. "I am absolutely sure that in every way I've complied with the ethics rules of the Senate both literally and in their spirit relative to any investment that I've made anywhere," he stated to the press. Unfortunately, he is correct—and that, of course, is the problem: this stuff is
completely
legal
and, according to Senate rules,
ethical.
When he made that statement, he should have stopped right there. Instead, he continued: "These earmarks do not benefit me in any way, shape, or manner financially, personally or in any other manner other than the fact that I'm a citizen of New Hampshire."
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Yeah, sure.