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Chicago and the Municipal-Industrial Complex | The Nation

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Rick Perlstein

Rick Perlstein

Where the past isn’t even past.

Chicago and the Municipal-Industrial Complex

CTA

The Chicago Transit Authority's fare payment system is undergoing an overhaul courtesy of Cubic Corporation, a leading defense contractor. (AP Photo/M. Spencer Green)

This is part two of a series on the perils of privatization. Read the final installment here. Read the first one here.

On Tuesday I quoted Chicago anti-privatization activist Tom Tresser about why corporate America is falling in love with cities: “We have a massive global movement of capital which, because they’ve burned their own fucking houses down through their own greed, don’t have the gilt returns that they’re used to receiving…. So the new guaranteed annual returns that big business and big capital are looking for is our assets.”

Consider the very model of the modern major municipal contractor: Cubic. Trading on the NASDEQ with a market capitalization of almost a billion dollars under the adorable stock symbol CUB, Cubic earns over 99 percent of its revenues from government contracts, according to a Credit Suisse equity research report. When it’s not mismanaging urban fare-transit collection systems like Chicago’s Ventra, it does a once-pretty trade as “the leading pure-play provider of [the] defense training and mission support service areas which stand at the heart of modern military practices.” But, as we’ll see, defense isn’t offering the gilt-edged returns it once did. So look for Chicago’s very stupid smart cards to come soon to a city bus near you. Look, in other words, for Cubic to be picking your pocket, too.

Cubic was founded in 1951 in a San Diego storefront as a modest electronics company specializing in precision distance-measuring equipment. In 1966 it developed the first electronic stadium scoreboard. Then it gained worldwide recognition for the first satellite-based surveying system—expertise that turned out to be useful for getting its foot into the door where the real money was: defense. Tracking systems for military aircraft. Measurement apparatuses for missile ranges. “These core technologies,” Credit Suisse’s analysts explain, “led to the development of combat training instrument displays.” By 1973 it had created the “world’s first Top Gun ACMI system for the Marine Corps Air Station at Yuma, Arizona,” whatever that is; “Later, Cubic pioneered the world’s first turnkey ground combat/instrumentation system at Hohenfels, Germany. The same technologies were incorporated into Cubic’s broadcast data links and combat personnel recovery system, which were used successfully during Operation Desert Storm and in peacekeeping operations in Bosnia.”

Its “best known products” now, according to a JPMorgan report, “are laser engagement simulation kits used to conduct realistic war games…communications products, such as data links, power amplifiers, avionics systems, multi-band communications tracking device, and cross-domain hardware solutions for multi-level security requirements.” Their subsidiary NEK Special Programs Group, LLC “[o]ffers special training services in the areas of combat marksmanship, close quarter battle, sniper and survival training, tactical evasion driving, tactical life saving, military freefall and winter warfare, mountaineering operations, and medical training and services…. Cubic supports three of the four U.S combat training centers as a prime contractor (e.g. Joint Readiness Training Center at Fort Polk), and serves as a subcontractor on the fourth.”

Which used to be a damned reliable customer base. But listen to the advice of the analysts at the House of Morgan: “The threat of sequestration continues to hang over defense segment funding, and we think Mission Support will be under pressure owing to DoD scrutiny of contractor sources.” They predict “flattish growth for these businesses.”

Good thing, then, that Cubic has a diversified product portfolio.

The San Diego company first got into the municipal fare-collection business when it bought a company called Western Data Products in 1971. Soon, it invented the world’s first plastic magnetically encoded tickets for Pennsylvania’s Port Authority. It is now the only publicly traded company in the business of providing RFID fare cards, like those used in Chicago's new system. And unlike with the defense stuff, when you’re part of the municipal-industrial complex, everything’s coming up roses.

A chart in the Credit Suisse report tells the story: “Smart Fare Card Penetration” was 9 percent of public transportation systems in 2007, 18 percent in 2009 and 22 percent in 2011. “The company is aggressively aiming to expand its addressable market from its current estimate of $2bn to $5bn,” says Credit Suisse. “The key driver in this segment is municipal transportation investment.” Investors are advised that “low smart card and growing magnetic reader penetration in the United States” is “a further positive in the long term.” Better yet, “aggregate passenger spending on public transportation shows little sensitivity to economic downturn and has increased every year.” Flat-lining defense spending? No worries. Cubic is covered. With guaranteed returns. Buy! Buy! Buy!

And so investors have bought, bought, bought. One of them, Blackrock, the largest investment fund in the world, owns 78,809 shares of CUB. Is it a coincidence that Blackrock CEO Larry Fink is a member of what Chicago Reader reporter Ben Joravsky calls Mayor Rahm Emanuel’s“ Millionaires Club”? I cannot firmly say. What I can say is that it makes perfect sense for the same sort of companies that once gave us the $500 hammer and the $750 toilet seat via “cost-plus” contracts that guaranteed gilt-edged returns, whether they did a good job or not, to keep mayors like Emanuel (who earned $18.5 million in two and a half years doing very little as an “investment banker”) on speed dial.

I wrote about the serial disasters of Chicago’s smart cards. But Cubic has the problem covered. The public relations problem, that is. Read one internal corporate communication: “The open payment system is likely at some point to be subject to criticism, so it’s important that all possible points of contention be considered and prepared for.” By making sure the problems are addressed? Not so much. “Spin,” a memo instead explains (emphasis added), “needs to be heavily positive.”

Speaking of spin, the Chicago Transit Authority’s head, Forest Claypool, has explained to the public that the horrific glitches have not yet cost the city anything because the CTA is holding back payment until the problems are fixed. He’s dissembling. As Credit Suisse’s analysts explain to investors (though I’ve never seen Chicago citizens get the same sort of straightforward explanation; telling, no?), “Most transport contracts are taken over ten years,” with almost half usually paid out up front: Vancouver paid Cubic 40 percent in advance for its smart-card system; Sydney, Australia, laid out 45 percent. Contrariwise, “for the Chicago project, revenue will be taken entirely over the ten-year span of the contract.” What seems to be happening here is that Cubic knew that Chicago’s rushed implementation, without a testing phase, would make for horrible botches and built that into the deal. They can’t be punished by getting money taken from them because there isn’t yet any money to take.

Once the kinks are worked out, though, and the problems are forgotten—that’s when the money rolls in, as if nothing untoward had ever happened. Indeed the public relations memo I quoted says as much, referencing the “need to spin the transition away from the [old] cards, and the fact that there are dates certain for that to happen.”

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Indeed, it looks like the perfection of Cubic’s evolving business model. Consider another revealing chart in Credit Suisse’s report on Cubic for investors, in the “Sales Growth Outlook” section. It shows “Backlog as % of Forward Two-Year Sales” over a four-year period. That’s a way of describing projected payments in a contract that are guaranteed down the line, but can’t yet be counted as revenue. The chart has three lines. Two of them, for Cubic’s Defense Systems and Mission Support divisions, turn worrisomely south. Like the man said, “The threat of sequestration continues to hang over defense segment funding, and we think Mission Support will be under pressure owing to DoD scrutiny of contractor sources.” But the Transportations Systems line, conversely, shoots promisingly skyward.

And once more Chicago’s City Hall gives away the store to Big Money, slicing its citizen on the cutting edge of the municipal privatization grift.

Read Next: Rick Perlstein exposes the many flaws in Chicago's new public transit payment system.

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