By:

Dave Kingsley

The Chestnut Street Project

This is the first in a series of posts about the “Chestnut Street Project:” a group of citizens attempting to reclaim an African American neighborhood on the East side of Kansas City, MO. As part of the project, members of the group have undertaken research into residential property ownership in the area – neighborhoods abandoned and neglected by city government.  Property records reveal that thousands of homes are owned by either investors or the Kansas City Land Bank. 

The activists have set up a center of operations in a rehabbed house on the 3800 block of Chestnut Ave (see pictures below). The 32 houses on the block are for the most part in a state of abandonment and deterioration.  A few homeowners still living on the block and in the neighborhood have made valiant efforts to maintain their homes while investors and the Land Bank neglect property which devalues all homes in the area.

What’s Ghetto Property Worth to Investors?

Why would limited liability corporations (LLCs), private equity firms, real estate investment trusts (REITs) and other entities invest in houses surrounded by vacant and/or deteriorating property in a neighborhood with high levels of poverty and few city amenities?  High net worth individuals benefit in several ways from investing in dilapidated ghetto property.  Given that wealthy investors tend to prioritize sheltering income from the IRS, rental property provides tax advantages in addition to revenue.  For instance, residential homeowners living in their homes cannot take depreciation allowances in tax codes, but landlords can.

Second, low-income tenants often qualify for Section 8 housing subsidies.  Hence, property that investors pick up very cheaply produces revenue from HUD that outpaces the market value of the property.  Over the past few decades, HUD and city housing agencies have allowed slum lords to neglect property while they collect hefty rents. For example, one house on Chestnut Ave was owned by an Australian retirement fund.  A family with several children lived in the home.  People were dumping trash in the right of way directly behind the house about which the city and owner did nothing (even though we incessantly called the city about the problems).  Polluted water was incessantly draining from a leak in the street next to the home where children played. The house was in disrepair and the yard overgrown.

Third, private equity firms and investors in general purchase property and make investments with other peoples’ money (OPM).  Interest can be deducted from taxes – along with other business expenses. 

Fourth, LLCs are pass through entities and do not pay corporate income taxes.  Investors pay capital gains taxes, which are lower than taxes paid by many wage and salaried employees.  Furthermore, capital gains taxes are often lowered further by other sheltering devices such as family trusts.

Two private equity firms have each bought hundreds of homes from the Land Bank, rehabbed them for little cost, and moved tenants in.  This is a form of what one could call internal colonialism: out of state and out of country financial firms expropriate African American land, extract value from that land, and put little to no resources back into the neighborhoods.

Future posts will discuss the history of apartheid in Kansas City, the destruction of viable African American neighborhoods by federal, state, and city policy, and how ongoing city politics related to economic development is continuing to rob African American citizens of the wealth they have been able accumulate.

By:

Dave Kingsley

Here are some questions to ponder: Why would the Family Office of a Billionaire be a major investor in a nursing home located in the tiny Southeastern Kansas town of Cherryvale?   Why would TIAA-CREF – a teachers, insurance, and annuity program – be the biggest owner of land in the Mississippi/Arkansas Delta?  Why would the Harvard Endowment Fund buy up forest land in Europe? 

The answer to each of these questions is that the U.S. economic system has undergone radical change in the past fifty years.  Indeed, the economic ground has shifted under our feet.  This shift has been tectonic, global, and influences every institution of society.  Much of government responsibility for the “general welfare” has been privatized and provides opportunities for investors with an immense amount of accumulated capital.

 Regardless of the theory of political economy to which one subscribes, throughout the past fifty years, monetary, management, and regulatory theories have driven a merger of government and business into a wild, wild west of unfettered capitalism.  This corporatocracy has resulted in massive pools of wealth in the hands of ultra-high net worth individuals, corporations, and institutions such as universities and sovereign wealth, and retirement funds.

Like water naturally seeks its own level, capital flows toward return on investment. In addition to a high return, investors seek protection from taxes, creditors, and all forms of liability.  Many state legislatures have accommodated that tendency by enacting laws for protecting and hiding assets.

Among other things, these massive pools of capital have resulted in monetization of every societal issue from crime to end of life care. Indeed, as the previous post indicates, even housing in neglected, abandoned, and deteriorating neighborhoods have been attracting private equity funds and institutional investors.

 Revenue producing real estate has become central to the institutionalization of human commodities such as frail elders, prisoners, soldiers, and troubled youth. Government guaranteed revenues are transferred opaquely from middle- and low-income strata of society through captured agencies, and secretive networks of shell companies to family offices, holding companies, Real Estate Investment Trusts, and other investment vehicles.

It is important for those of us advocating for economic justice to focus on how the economic system works and what it portends for the future of institutionalized Americans and the future of democracy.  The COVID pandemic swept through long-term care facilities, meat packing plants, and prisons because in the current economic system management theory accords priority to investors over stakeholders.  Patients, customers, inmates, students, and communities are not the priority of management – finance and extraction of value for shareholders is the top priority of executives, and this aided and abetted by government.

By:

Dave Kingsley

Avocado Post-Acute Care in San Diego is a facility owned by a limited partnership – Eldorado Care Center LP. This facility came to the attention of the media because of a large number of COVID deaths, and a rating of 1 on the CMS Nursing Home Compare website.  I was contacted by a reporter for a local PBS station. She was attempting to trace ownership of the facility.

The “indirect ownership interest” (100%) is listed by CMS as the Jacob Graff Living Trust.  Living trusts are set up by wealthy individuals for managing and protecting their assets – usually a family’s wealth.  I won’t get into the weeds on trusts in this post.  Suffice it to say that trusts are financial vehicles for keeping wealth away from the IRS – especially from collection of inheritance taxes.  This is a problem because these types of financial machinations are fueling wealth maldistribution.  This is the reason I have been advising advocacy organizations to add attorneys and financiers who understand corporate ownership structuring and finance to their boards.

I checked the San Diego County property database and discovered that the building was owned by an LLC. Property records won’t reveal the owner of an LLC – neither will secretary of state business search databases. However, addresses on the documents and Jacob Graff’s signatures revealed that his real estate business is the owner.  The market value of the property was assessed at $11 million.  Indeed, the long-term care business is far more about real estate than it is long-term care.  This property LLC most certainly has a “triple net lease” with Eldorado Care Center LP.  Under a triple net lease, the leasees pay taxes, maintenance, and insurance.

Continued searching of records regarding Jacob Graff revealed that he owned four other long-term care facilities in California – all of which were under the umbrella of a real estate property management firm in Beverly Hills, California.  Furthermore, on February 14, 2013, McKnight’s reported this: “A federal jury recently assessed penalties of 28.1 million against the former owner of an Illinois nursing home on charges that include Medicare & Medicaid fraud.”

According to the article, the defendant was Jacob Graff.  Apparently, this case arose from two nurses who “blew the whistle” for substandard care and fraudulent billing.  The nurses were fired to “silence their complaints.” 

The facility, Momence Meadows Nursing Center (MMNC) in Kankakee, IL was fined more than $19 million for “filing more than 1,700 false or fraudulent claims to state and federal agencies.  “Additional fines were levied because the “worthless services” provided by the nursing home resulted in the government losing more than $3 million.”

How many owners like Jacob Graff can we find among owners of the 15,500 long-term care facilities in the U.S.? That is still unknown.  We need to determine that.  I keep discovering them as I search through murky ownership structures in the nursing home business. 

By:

Dave Kingsley

Macroeconomic Trends & Long-term Care Ownership

The long-term care industry reflects macroeconomic trends of the past half century.  With excess liquidity in the capital markets and increasing concentration of wealth in the hands of a small number of ultra-high net worth individuals, asset protection and finance have become major, if not dominant, purposes of corporate management.

An analysis of ownership structures in the nursing home business suggests that a large proportion of investment is driven by protection of personal/family, institutional, and corporate wealth. In the past few decades, state legislatures have passed legislation designed to provide secrecy and shelter from taxes, liability, and creditors.  Wealthy individuals avail themselves of these laws to keep their wealth intact and safe from the IRS and creditors during their lifetime and after their death.  Because of recent legislation, for example, South Dakota collects a large amount of fees for setting up the most protective of asset protection trusts.

States such as Nevada, Delaware, and Alaska are the most beneficial places to incorporate businesses and the shell companies (shell corporations have no offices and no employees) useful for hiding assets and keeping tax collectors and creditors at bay.  Long term care corporation ownership is mostly designed around processing funds through a network of Limited Liability corporations – many of which are shell companies.

Low- and middle-income Americans expend all their assets in long-term care before they find themselves in a position to ask for “welfare medicine,” i.e., Medicaid.   These are assets they would otherwise leave to their heirs. Personal and government funds are extracted by investors who use the tax codes to avoid meeting their obligations to support the public interest and repay the society enriching them.  A dollar in real estate related and other forms of tax avoidance is worth more than a dollar in operator profit.  Extraction from the mass of wage and salary workers by the wealthy exacerbates maldistribution and becomes a feedback loop in which inequity becomes continuously worse.  

The essence of the long-term care industry is the parking of capital owned by ultra-high net worth individuals in networks of entities designed for maintenance and enhancement of individual and family wealth.  Various forms of trusts are set up to protect and grow individual and family wealth.

By:

Max J. Skidmore

The election is over.  Joe Biden won.  But a serious issue related to the funding of Social Security is hanging over the Biden Administration and the next congress:  will the funds deferred from the payroll tax by President Trump be restored to the Social Security Trust Fund?

Background

The financing for America’s Social Security system comes from a payroll tax, FICA (the Federal Insurance Contributions Act) levied on wages up to $142,800 (for 2021; the amount changes yearly). Wages above that amount do not count for purposes of the system.

The tax is 6.2% deducted from the employee’s wages. The employer matches that amount, thus providing an additional 6.2%.

Those amounts go into trust funds. Benefit payments come out of those trust funds, as do the very small administrative costs. Those costs are extremely low, less than 1% of the amount collected, making Social Security the most efficient such system in the world. 

The rest of the amounts in the trust funds (that is, the amounts left over after paying benefits and paying administrative costs) are invested in government bonds. Those bonds are completely safe, and regularly pay interest back into the trust funds.

Under the law, all benefits must come from the trust funds. So long as FICA taxes keep coming into those funds, there will always be income to pay for some level of benefits. 

Under the Obama administration, during the financial crisis that President Obama inherited, FICA taxes were temporarily suspended in order to make more money available to workers. This did not affect the trust funds, however, because the government replaced the amounts that the trust funds would have received from FICA.

President Trump’s Executive Action Regarding Payroll Taxes

Last August, President Trump issued an executive order delaying the collection of FICA taxes for the rest of the year. This order did not reduce the taxes owed; it only delayed their collection. 

Employers and employees will have to pay the accumulated taxes after the first of the year, and therefore many employers are continuing to collect FICA taxes, and are holding them to provide them to the government when they come due. This prevents them, and their workers, from having to come up with large payments to catch up on the amounts owed. 

The reason for this rather confusing policy has not been made clear. It may reflect a misunderstanding by Mr. Trump regarding how Social Security’s financing operates. 

On the other hand, he may have been making a move toward eliminating the payroll tax, and thus eliminating Social Security. Mr. Trump suggested that this may be his preference, but this cannot happen without a change in the law. Such a change would only be possible if Mr. Trump is re-elected, and if Republicans keep control of the Senate, and gain control of the House.

If the law were to be changed, and the payroll tax eliminated, it would be only a few months before the trust funds would be completely exhausted, and Social Security would be eliminated. Mr. Trump has made no secret of his desire to kill the system, and many Republicans – probably most of those in Congress – agree. Since Republicans did not have the courage to oppose Donald Trump, even those who do not agree with Trump would almost assuredly vote to do whatever it was he proposed.

Democrats all desire to retain the system, and even to expand benefits. Thus, the November 4th election was crucial to Social Security’s future. 

For the system to continue, it was essential to vote Trump out of office, to retain Democrats in control of the House, and to elect more Democratic senators, so that Democrats will control the Senate as well as the House. Now we have some uncertainty due to the two senate races in Georgia.  Those races could be critical for restoration of deferred taxes to the Social Security Trust Fund.

It is impossible to overstate the importance of massive Democratic victories at all levels, if Social Security, Medicare, and many other essential programs are to continue, and if other much-needed programs are to be enacted.  We had some important victories, but not a massive blue wave that we were hoping for.  Now, saving the Social Security System will be a matter of activism and fighting hard for a system so many people depend on in retirement and in other ways.  It will be important to learn your senator’s and congressperson’s phone number and make yourself know to them.

By

Dave Kingsley

Definition of Socialism and its Application to Medicare

Socialism is defined simply as “an economic system in which government owns the means of production.” The Medicare system produces no products and provides no services. The system does not manufacture pharmaceuticals or medical devices, it owns no hospitals or long term care facilities. It employees no nurses or physicians or other health care professionals for the purpose of providing services in a medical care facility. It is a program for underwriting health care risks for individuals who pay into it.

There is nothing socialistic about government management of a pool of funds provided by current and future beneficiaries for the purpose of paying for their medical care. In 2019, the program spent nearly $800 billion. In the current political and economic context, approximately 60% of all funds expended by Medicare is derived from the people receiving care. The other 40% is transferred to the program from the U.S. Treasury. This transfer would be unnecessary if a corrupt political process were not allowing excessive charges for services and products.

For instance, the Medicare Modernization Act in 2003 created a prescription drug benefit (Part D) and included a provision that prohibited negotiation of pharmaceutical prices by the Center for Medicare and Medicaid Services. Through enforcement of proper management of costs by providers, and reasonable charges for costs, the 40% transferred by the Treasury could be eliminated, thereby making the program fully funded by the beneficiaries.

By Dave Kingsley

Private Equity is One Model in an Array of Business Models Comprising the Long-term Care Provider Subsystem.

It is practically de rigueur these days to focus on private equity ownership of “nursing home chains” as the leading culprit in lowering the quality long-term care.  I am noticing this tendency on the part of progressive politicians, researchers, advocates, and activists.  No doubt, major private equity buyouts of long-term care chains have proven lucrative to PE firms and their investors while they have been disastrous for patients, families, employees, taxpayers and communities.

    Nevertheless, complex, dynamic social systems cannot be reduced to a few variables.  In science that is known as reductionism – a fallacy.  Far too many factors are overlooked when systems are reduced to a few variables or a single subsystem.  The system of long-term care facilities is complex and dynamic with a large number of interacting and reinforcing subsystems. 

    The corporate subsystem itself is comprised of a variety of ownership structures.  In addition to PE firms, long-term care corporations are organized as publicly listed holding companies, Real Estate Investment Trusts, family trusts, family offices, and limited liability corporations.  Most of the firms operating long-term care facilities are closely held and the public has no access to their financial statements.

    Approximately 25% of long-term care corporations are 501(c)(3) nonprofit entities.  A small number of nonprofit run facilities are high quality facilities.  Although the nonprofits have, on average, slightly higher scores on measures of quality, e.g., higher RN hours, lower number of complaints, and abuse and neglect cases.  However, many nonprofit operations are substandard.  For instance, the Evangelical Lutheran Good Samaritan chain runs on of the largest chains in the United States and has a poor track record and lower than average scores on measures of quality.

Major Subsystems of the Long-term Care System

    In addition to corporations reimbursed for providing care, federal and state legislatures, government agencies, trade associations, and advocacy organizations are major subsystems of the long-term care system. My research and observations have led me to hypothesize that these systems interact in a manner that reinforces the fundamental model of care that has been standard since inception of publicly funded long-term care, which is “the total institution.”

    Evidence for this hypothesis will be presented over time on this blog.  Also, I believe that too much focus on the PE subsystem distracts from the impact of macroeconomic trends since the 1970s. Economic and managerial philosophy has shifted finance from an auxiliary role in corporate governance to the dominant role.  The purpose of corporations has become finance rather than production of goods and services.  The long-term care system is part of the larger economic system which has become increasing characterized by management that values investors and treats stakeholders as resources to be exploited.

    Furthermore, the legal structures of trusts and corporations are designed for tax avoidance, debt, and asset protection and enhancement.  High net worth individuals can utilize these structures to pass more of their wealth to heirs and keep it out of the grasp of the IRS.  Not only does this system allow wealthy individuals and families to extract middle- and low-income assets for their own benefit, it allows them to avoid their obligations to the society that enriches them.

By Dave Kingsley

It is Overwhelmingly Clear that Key “Nursing Home” Institutions Should Have Known What Was Coming.

CNN is reporting 274,121 COVID deaths in the U.S. as I write this post. It is estimated that 40% of these victims are long-term care patients and employees; hence, approximately 109,648 patients and staff in long-term care facilities have died from COVID throughout the pandemic.  Had  responsible parties in the system been prepared and acted responsibly, these deaths could have been prevented.

Decent medical care includes identification of possible and probable infectious diseases.  But that has been pervasively lacking in the profit and nonprofit long-term care system.  That is despicable and inexcusable.  If corporations extracting wealth from long-term care didn’t know a disease was coming that could kill a high proportion of people in their care, they should have known. “In the United States, in 2013, the Bill & Melinda Gates Foundation conducted a comprehensive review of worldwide data and predicted that a pandemic would occur during the next decade, most likely due to coronavirus.”[1]

The word was out in December of 2019 that a novel virus was spreading in China and causing some drastic government action by the Chinese government.  U.S. intelligence services were well aware of the spreading virus by late 2019.  By January of 2020, anyone reading major newspapers should have been aware that a global pandemic was probable.  Asian countries were aware of the spread of a coronavirus and taking extraordinary action to shut it down – which they did.

What did the U.S. long-term care industry do while China, Singapore, Hong Kong, Taiwan, and South Korea were taking action to block the spread of COVID?  Corporations extracting an extraordinary amount of cash from facilities for their investors continued business as usual. They did not have sufficient personal protective equipment stocked when the pandemic hit; they had no protocol in place for protecting patients and staff; they failed to put a testing program in place; and, they had no plan for acquiring separate buildings for quarantining infected patients and staff.  This lack of preparation for preventing an infectious disease under any circumstances is inexcusable, but in the face of a deadly, rapidly spreading pandemic, it is an atrocity.

Based on the architecture of long-term care facilities and the fragility of patients forced to live in close proximity, a tragedy was waiting to happen. Furthermore, staff continued to pass between the community and facilities without testing, PPE, and a clear understanding of the dangers involved with the disease.  Long-term care corporations set their patients up as “sitting ducks” in the spread of a highly contagious and novel virus for which no vaccine was available.  This deadly medical malpractice occurred with the acquiescence of the CMS, state regulatory agencies, and local health departments. 

    It was gross negligence for responsible parties not to recognize as early as December 2019 that COVID-19 would be a threat to the million plus patients in U.S. long term care facilities and take action to protect them.  All responsible parties, including long-term care providers and government agencies at the federal, state, and municipal level should be investigated and held accountable by a commission independent of those corporations and agencies.

[1] Solano, J. et al. (2020), “Public Health Strategies Contain and Mitigate COVID-19:  A Tale of Two Democracies.” The American Journal of Medicine, Vol 133, No 12, 1366. Renowned infectious disease expert Laurie Garrett and most other scientists involved with novel diseases – especially the coronavirus family of virus – were warning about the likelihood of the emergence of a virus like COVID-19.  See Laurie Garrett and The Coming Plague at https://www.lauriegarrett.com/the-coming-plague.

By: Dave Kingsley

Family Trusts and Other Legal Entities Are Major Investors in Skilled Nursing Facilities

There are many ways that vast amounts of wealth are being processed through nursing home financial plumbing for the purpose of shielding it from the IRS and adding value to accumulated capital.  Private equity has become the focus of discussion regarding nursing home ownership and neglect of patient care in in this process. Indeed, the notorious Carlyle Group takeover and bankrupting of HCR ManorCare will have a permanent place in nursing home lore.

    However, exclusive attention on private equity as the cause of shareholder over stakeholder management, distorts reality, which is this:   nursing home ownership is structured for shielding wealth of high net worth individuals (HINWIs – pronounced “hin wees) from taxes while adding value to their assets. Many financial structures are in place for making nursing home ownership a process piping system for avoiding taxes and creating more private wealth with public funds.

    I will be blogging about many forms of entities owning a share of the nursing home business in the United States. This post is about the “family trust.” In an analysis I have undertaken of owners listed by CMS for 344 long-term care facilities in Kansas, I found that 15% of the private, forprofit facilities had a family trust listed in the ownership hierarchy – several in some instances.  In researching NH ownership in various parts of the U.S., I have noticed that family trusts appear frequently as owners (usually indirect owners). 

    These legal entities allow wealthy individuals and families to shield their wealth from taxes and to pass assets tax free to heirs.  They also provide protection from creditors. So, taxpayers are denied their fair share of revenue from businesses they fund while wealth becomes increasingly maldistributed and concentrated in a tiny fraction of the U.S. population.

    As Nicholas Shaxson pointed in the The Finance Curse, transformation to a financialized economy received a boost in the 1970s through state and federal legislation. Legislatures created financial mechanisms such as the LLC for the purpose of tax avoidance, limited liability, and financial secrecy. Indeed, the state of Nevada has been dubbed “The Cayman Islands” of the United States.  It is not uncommon to find many LLCs in the network of operators, shell companies, and real estate incorporated in Nevada (or Delaware).

    In the 1990s, the state of South Dakota became the place to set up a family trust.  In a move to attract business, the state legislature passed laws that provide a haven for super-rich families to hide and protect wealth in a variety of trusts, e.g. “irrevocable family trusts.” However, the wealth sheltered in these trusts will be invested for obvious reasons (e.g., growing assets faster than inflation). So, the nursing home ownership networks frequently include one or more family trusts.

    Although trusts are a major type of investor in skilled nursing home facilities, there are others such as “the family office” (a financial manager for immensely wealthy individuals and their heirs), the Real Estate Investment Trust, and LLCs set up by wealthy individuals for purposes of tax avoidance, opaqueness, and, of course, earning a return on investment. This blog will be shining a light on the financial piping system set up to circulate wealth for tax avoidance and return on investment while frontline care is denied resources for high quality of care.