Whether you are an investor in Tesla or LOSD municipal bonds, governance matters. And tomorrow could be a remarkable day for both Tesla and the municipal bond market as both boards meet. Tesla’s CEO is of course Elon Musk and the Chair of LOSD is Brian Bills.
Today important governance provisions will be challenged in both meetings and a determination made whether all investors and taxpayers are represented or whether its an insiders game.
The purpose of this post is to reveal an important dynamic behind Elon Musk’s proposed compensation package in addition to challenge a proposal for the Lake Oswego School District (LOSD) to demolish its most important school and hand over its most valuable asset to the City of Lake Oswego in a sweetheart deal to the City, developers and bond merchants.
A key question is whether the boards are truly independent or rather advocates for insiders, choosing a “set of facts” to advocate a desired outcome rather than the actual set of facts. Such advocacy is a common legal tactic to represent clients, whether in the right or wrong, yet corporate governance, whether for a private or public enterprise, prohibits this.
The LOSD meeting is carefully scripted, an executive session, and closed to the public. A first glance at the agenda one might ask, has the school district planned poorly and while up against labor negotiations simply trying to generate funds to cover operating expenses by doing a “real property” development deal with the City?
China has learned a hard lesson that demolishing thriving neighborhoods and schools in favor of development deals, in which revenues are split, is no way to run government and pay for monthly operating expenses. China needs a basic property tax.
This proposed “development” deal may indeed violate the school districts bond covenants, in addition to government accounting and auditing standards. These explicitly state in the Material Disclosure Certificate that “the release, substitution, or sale of property securing repayment of the bonds, if material be disclosed within 10 days.”
SEC proxy rules also mandate disclosing all material items going into such deliberations and in Teslas case, a material tax impact is not being disclosed.
The SEC of course also now aggressively regulates Municipal Bonds given all the creative accounting that occurred in the 2009 financial crisis. The most recent bond issued by the LOSD is for $150 million, under CUSIP 17909PH2, underwritten primarily by the Bank of America. Many investors have renewed interest in municipal bonds due to the rise in interest rates.
The districts legal counsel is Mersereau and Shannon, Attorneys at Law in Lake Oswego, and its CPA is Grove, Mueller & Swank, based in Salem, Oregon. This CPA firm has audited the school districts financial statements to conform with Government Accepted Government Accounting Standards (GAGAS). It is not known if the CPA firm is advising the board on this proposal. What is certain is that this is a material event to its financial statements.
Like many school districts, Lake Oswego School District has an unfunded liability for its PERS pension system and has accumulated what is called “side account” debt obligations to moderate the stress on operating budgets resulting from required pension contributions..
What allows the district to still maintain a high bond rating is not only its capacity to tax yet also the strength of its balance sheet. This includes property like the Lake Grove Elementary School site in question that are on the books at essentially no cost, yet could indeed in the future help greatly in fulfilling this important PERS obligations to teachers.
Such a transfer of assets from the district to the City in a “sweetheart” leasing deal could indeed be viewed as pension fraud, for which the SEC and DOL have jurisdiction, even though neither directly oversees public pensions. Specifically, special “anti-fraud” provisions allow them to directly intervene.
Two recent examples of fraudulent pension transfers in the private sector in Oregon include Ross Island Sand and gravel, in which Bob Pamplin, owner of the Portland Tribune and Lake Oswego review newspapers, essentially stripped away a significant portion of the employee pension by selling it land at inflated prices. This has been chronicled by Pulitzer Prize winning journalist Nigel Jaquiss of The Willamette Week newspaper.
The second example involves the private equity firm Meritage along with CBRE, Goldman Sachs and others, in which Meritage bought Les Schwab Tire Centers just after the company bought back leases owned by the pension plan at artificially low prices, essentially looting the pension of 15 percent of its entire assets for all 7,OOO employees. It is not known whether this has resulted in a legal action.
LAKE OSWEGO SCHOOL DISTRICT AGENDA FOR JUNE 13, 2024
In reviewing the agenda for the June 13, 2024 LOSD School Board meeting, one might ask, why doesn’t “Real Property” simply state demolish and sell off or lease the Lake Grove Elementary School property, the fastest growing and best location for a grade school in the district. And even if the Superintendent did oppose this deal, which makes no sense on either a district wide planning or financial level, what could be called the board breaching its fiduciary duty to the district, would the superintendent voice these concerns prior to their “evaluation by the board as indicated on the agenda?
There has been a lot of manipulation, intimidation and stoking unnecesary conflicts by this board and the city , which is unfortunate, yet perhaps that is just part of the current political reality.
The Mayor of Lake Oswego’s family has two wonderful restaurants within one block of the school scheduled to be demolished for development. He states on June 6, 2024 “As I wrote to you before, school facilities are (bold type from here) “not an issue before the City Council.”
Contrast this comment from Mayor Buck on June 6 to the LOSD long term planning committee minutes referenced below from its April 1, 2024 meeting:
Lake Oswego already has a beautiful community center on the South Side, the Lakewood. And on the north side is the extraordinary campus of Portland Community College, Sylvania campus. See photo welcoming drivers to Lake Oswego, behind those trees is the PCC campus.
Elon Musk’s Compensation Is Material to Cash Flow For An Unexpected Reason
Few will question that Musk is indeed a brilliant entreprenuer, yet is he worth a compensation package approaching $50 billion, a package forwarded by a board that includes his brother and other board members that are not truly independent?
Although the Tesla vote is today, no one in the financial press seems to have figured out what’s really at stake here.
It was 20 years ago when I stunned the financial press with the notion that Bill Gates was running a pyramid scheme at Microsoft in which employees were prepaying their wages, the company was speculating on its own stock in the options market and grossly misreporting earnings.
No one is saying Musk is running a pyramid scheme. He has, however, revealed Teslas future cash flow vulnerability if the comp package is rejected.
What Gates did at Microsoft was champion the conversion from issuing Incentive Options (ISO’s) to what are called Non-Qualified Options (NQ’s) The grand bargain was that NQ’s would get no special long term tax treatment for employees and appear as W-2 wage income when exercised.
This was done so the company could get a tax deduction for the same amount of the gain on each employees W-2.
And the icing on the cake for Microsoft was that they could get deductions for these wages paid in stock exceeding $10 billion in some years and not reflect a dime of this expense on their income statement.
As Ken Lay of Enron famously said during the same period, we are going to be the Microsoft of the energy field, code words for financial engineering. His problem was they did not have a cash generating monopoly to cover its losses.
I mentioned this concern to Pam Edstrom, considered Gates keeper, and she had Bob Herbold call me. So much integrity she had. Bob said, look Bill, everyone is doing it. My reply was that they were the “pied piper” and leadership was necessary. Sadly, Microsoft indeed went on to manufacture the .com crisis by leading this scheme.
Ultimately I wrote two pieces for the WSJ and its sister publication Barron’s. The first was to be a point/counterpoint on why Microsoft should pay a dividend. Then CFO Greg Maffei caved and the article never appeared as they agreed to pay their first dividend.
The second piece was 1,200 words regarding Microsoft issuing too many NQ options, suggesting instead that they issue restricted stock that vests in 5 years. Within 30 days of the articles printing Microsoft terminated its option program and began issuing restricted stock that vests over 5 years. The NQ program had been an absolute bust for more than half its employees and the strategy of using restricted stock has become the new industry standard.
And finally when Gates and Ballmer both found their happy places away from Microsoft, Ballmer owning the Los Angeles Clippers basketball team, and Gates settling in as the nations garbage collector, that is the largest shareholder in Waste Management and Republic services, Microsoft blossomed under the leadership of Nadella.
My sincere apology for the boring history yet it helps frame what is really happening at Tesla.
TESLA NEEDS THE MUSK STOCK OPTION TAX DEDUCTION TO SUSTAIN ITS STOCK PRICE
In Elon Musk’s case, since stock options are valued at the time of issuance and, in this case likely represented less than 5 percent of the current value of the stock, one can assume that giving Musk $50 billion in stock will result in a tax deduction for Tesla of $45 billion, a staggering sum that allows it to run as a tax exempt entity for a few years. A huge competitive advantage via a cash flow generating machine resulting from lower taxes.
This compensation package will also allow Tesla to inflate its earnings since the stock based wage tax deduction for Musk’s $50 billion in options will not appear as an expense on the income statement, only on the tax return the public does not see. Tax people call this a “permanent timing difference.”
NOKIA DISPLAYS GREAT GOVERNANCE AND A FIRST RATE COMPENSATION PROGRAM FOR ITS CEO PEKKA LUNDMARK
Unlike Musks option, Pekka Lundmark receives mostly restricted stock. Stock that vests over a 5 year schedule and whose cost is fully reflected in the financial statements. Put another way, if $200K vests and results in a $200K tax deduction, the $200K shows on the income statement as an expense. Imagine what would happen to Teslas earnings if the true cost of his options were on the income statement?
MICHAEL DELL: A LESSON IN CAUTION FOR INVESTORS
Dell was one of the tech stars in the late 90’s, reaching a valuation of $122B. Then Michael Dell took it private in 2013, with private equity backers, for $24 billion. Essentially long term shareholders were sold out. Five years later he took the firm public again and today owns a 51 percent stake or roughly $48 billion.
Like Musk he is focused upon helping himself first, which is fine, yet caveat emptor to investors.
