Rate of Exchange

Southwest Flight 620 leaves Austin at 6:30 a.m. and arrives at Houston Hobby Airport 45 minutes later. On Monday, September 9, 2002, one of the passengers on board Flight 620 was Susan Lilly, according to an extraordinary document that could well have a seismic impact on the future of state government in Texas.

In 2002, Lilly worked as a fundraiser for the political action committee Texans for a Republican Majority (TRMPAC). Currently under investigation by a Travis County grand jury, TRMPAC was created in part by U.S. House Majority Leader Tom DeLay (R-Sugar Land). The “Hammer” as he is known on Capitol Hill, didn’t just need to fund the election of any old Republican majority, he needed public officials that would vote his close friend State Rep. Tom Craddick (R-Midland) speaker of the Texas House, and then pass an unprecedented mid-decade congressional redistricting plan.

Sometime between 7:15 a.m. and 9:00 a.m. that September morning, Susan Lilly met up with State Rep. Beverly Woolley (R-Houston). Today, Woolley is chairwoman of the powerful Texas House Calendars Committee through which major bills must pass to come to a vote. But on that morning, she was just a first-time vice-chair of the House Pensions and Investments Committee. Since arriving in the Lege in 1995, Woolley had received good committee assignments in energy and finance from Speaker Pete Laney (D-Hale Center), but not much in the way of leadership opportunities.

Woolley and Lilly were about to embark on a whirlwind fundraising tour. In five and a half hours they would conduct six meetings. The list of participants reads like a who’s who of Houston energy and finance executives. The itinerary is on a typed memo obtained by the Observer and first mentioned in the Houston Chronicle. At the top, it’s dated September 9, 2002, and titled “TRMPAC Houston Schedule – Hon. Beverly Woolley, Susan Lilly.”

What is startling about the memo is not the typed itinerary but the notes written in small script all over the document. Next to most every name is an entry, an apparent list of what legislative areas held the prospective donor’s interest. Scrawled on the top of the memo-with likely a little bit of triumph-is written “36K day + 25 Reliant.” All told the day netted TRMPAC at least $53,000.

Five calls to Woolley for comment for this story were not returned. Lilly, who has testified and produced documents for the grand jury, acknowledged that the meetings took place but referred all questions to her attorney. “Susan Lilly did nothing inappropriate and certainly nothing unlawful and I don’t think she has anything to worry about,” said her lawyer J.D. Pauerstein.

Regardless of whether the grand jury finds anything involving the Houston trip illegal, the memo is an extraordinary document.

“I think the memo confirms people’s suspicions about how the campaign finance system works,” says Craig McDonald, who is executive director of the watchdog group Texans for Public Justice and who has heard about the documents. “Donors give for policy or access or even more explicitly it appears here, they have a specific legislative agenda that they are trying to buy and the politicians look like they were easily willing to sell.”

After meeting with energy industry people all morning, it’s not clear Woolley and Lilly even had time to grab lunch before diving into the arms of other special interests. At 1:30 p.m. that Monday afternoon, Woolley and Lilly visited the Houston office of Charles McMahen, according to their itinerary. The 2002 general election was just 60 days away, and TRMPAC had big goals. The political action committee-along with a highly organized group of allies that included the Texas Association of Business-had targeted 22 House races in hopes of electing a large enough Republican majority in the Texas House to install Craddick as speaker. To do this, TRMPAC needed a lot of money. That’s where McMahen came in. He was then vice chairman of Alabama-based Compass Bank, which had amassed a significant amount of cash in its political action committee to spend on the 2002 election. Lilly, Woolley, and TRMPAC hoped to tap that Compass cash flow.

Notations on the itinerary appear to indicate that Lilly, Woolley, and McMahen discussed campaign contributions and potential legislation for the coming 2003 session at their meeting that Monday. One note, to the left of McMahen’s name and Compass Bank, reads, “22K direct.” This, it seems, refers to campaign donations McMahen promised. On the other side of McMahen’s name, the hand-written notes read, “Want to clean up home equity lending.”

Four days after the meeting, on September 13, 2002, Compass Bank’s political action committee made exactly $22,000 in direct contributions of $1,000 each to candidates in 22 pivotal Texas House races, according to an Observer analysis of campaign finance records. Twenty-one of those checks went to Republicans, and not just to any Republicans. Compass donated to the exact slate of candidates supported by TRMPAC money and TAB’s disputed “issue ads.”

The only Democrat to receive Compass Bank’s largesse was Houston incumbent Debra Danburg, who later lost a close race to Republican Martha Wong (after the election, Compass made a $1,000 so-called “late train” contribution to Wong). Compass may have backed Danburg because she was a then-powerful committee chair under then-Speaker Laney and hailed from Houston, the company’s base of Texas operations. In fact, a hand-written note next to McMahen’s name on the Houston itinerary reads, “Debra.”

McMahen has since retired from Compass Bank. As the Observer went to press, he was traveling and couldn’t be reached for comment. Besides that one Democratic contribution, Compass gifted $1,000 to Republicans Todd Baxter, Wayne Christian, Glenda Dawson, Dan Flynn, Mike “Tuffy” Hamilton, Rick Hardcastle, Gene Seaman, and Jack Stick, to name a few, all on the same day, all TRMPAC-championed candidates.

Later in September 2002, Compass Bank contributed additional money to several other campaigns dear to TRMPAC’s cause. Compass donated $15,000 to Republican Attorney General Greg Abbott (who would later rule on DeLay’s much-desired congressional redistricting), and $2,000 to state Sen. Bob Deuell (R-Dallas), whom TRMPAC backed in a key race against then-incumbent Democrat David Cain.

Why did Compass Bank contribute a total of nearly $40,000 to TRMPAC’s favored candidates? It’s difficult to know for sure. But the itinerary seems to give an indication of McMahen’s priority: equity lending.

Eight months after the Houston meeting, at the end of the 2003 regular session, the Legislature approved a landmark constitutional amendment that delighted the banking industry. Senate Joint Resolution 42 (later known as Proposition 16) allows banks and mortgage lenders, for the first time in state history, to offer home equity loans on lines of credit. In the past, banks had to hand out these loans, in which a client borrows against the value of a house, in one huge lump sum. Borrowers had to pay back the loans entirely by a certain date. Prop. 16, allows lenders to loan smaller amounts on credit-much like a credit card-a debt that can live on almost indefinitely. This gives banks the chance to provide more home equity loans, and boost’s the serious money lenders can make on interest payments. Last fall, the Associated Press reported that, with regard to line-of-credit home equity lending, “Compass Bank had sensed a major marketing opportunity in the nation’s second-most-populous state, which has 4.7 million homeowners, including 1.4 million who own outright without a mortgage.”

Voters overwhelmingly approved Prop. 16 in last September’s constitutional amendment referendum and Compass Bank was ready. It had put its employees through a half-day seminar on the new line-of-credit lending. The morning after the amendment passed, Compass Bank was already offering the new home equity loans. As Compass spokesman Tom Dingledy says proudly, “We were first to market with this.”

Clearly, Compass Bank, and others, expect to earn millions. But is line-of-credit lending good for Texas consumers? After all, the state banned the practice for 150 years for fear that borrowers would lose their homes. Texas was one of the last states in the country that didn’t permit this type of lending. “We’re not trying to portray this as something that’s carefree,” says Compass’s Dingledy. “It’s a tool, and like anything else with credit, you have to be careful how you use it. But it’s much more flexible [for borrowers].”

But consumer groups opposed Prop. 16 in the Lege. While they agreed that line-of-credit lending offered borrowers more options, public interest groups argued that lawmakers should first deal with the lending market’s current problems. Consumer advocates feared that without further safeguards for the public, an expansion of home equity lending would cause an explosion in predatory lending to vulnerable homeowners, exposing more Texans to crushing debt.

Consumers Union and AARP backed another constitutional amendment, known as SJR 52, by Sen. Royce West (D-Dallas), that would have implemented a series of consumer protections aimed at scuttling predatory lending practices. Lenders such as Compass Bank lined up against SJR 52, and, consumer groups say, killed it. The amendment never even earned a hearing in the Senate Business and Commerce Committee chaired by Sen. Troy Fraser (R- Horseshoe Bay). That’s rather extraordinary given that most constitutional amendments at least get committee hearings. Even the proposed amendment to place a moratorium on the death penalty-a bill that was lifeless the second it was printed-was heard in committee. Last session, it was clear who had sway in the 78th Legislature. Compass Bank and other lenders won the new loan market they craved. Meanwhile, as Consumers Union’s Rob Schneider put it, the Lege “didn’t address the [lending] problems that are sinking little old ladies.”

Right before they visited McMahen that Monday, Woolley and Lilly had met Bruce Gibson in his office on the 47th floor of the Reliant Energy tower in downtown Houston. Gibson served in the Texas House in the 1980s, before settling into life as a well-paid lobbyist for Reliant. After the 2002 election, he would become chief of staff for Lieutenant Governor David Dewhurst.

Soon after the meeting, Reliant contributed $25,000 in corporate funds to TRMPAC, according to federal campaign records. That donation was part of $600,000 in corporate cash that TRMPAC raised and spent, possibly illegally, on campaign activities. How TRMPAC used and acquired those funds is at the heart of Travis County District Attorney Ronnie Earle’s ongoing investigation into TRMPAC, Speaker Craddick, and TAB [see “Scandal in the Speaker’s Office,” February 27, 2004]. Included in TRMPAC’s $600,000 soft-money corporate haul is a $50,000 contribution from another energy giant, El Paso Energy.

Gibson says he remembers the meeting, but can’t recall what was discussed. He said he clung to a strict policy of never discussing legislation and campaign contributions together. “It’s always been a bright line for me,” he says.

Unlike the entries on the Houston itinerary memo for every other meeting Woolley and Lilly held that day, there are no legislative suggestions written next to Gibson’s name.

Nevertheless, Reliant and El Paso Energy seem to have done quite well from the 78th Legislature. Around the time of Gibson’s September 2002 meeting with Woolley and Lilly, Reliant Energy was splitting its operations. As required by the state’s laws that had already deregulated the electricity market, Reliant separated its production and electricity line divisions from its electricity provider. The production sections were named CenterPoint Energy. Reliant Resources became the company the sells electricity to most homes in Houston. Despite the split, however, industry observers say the two outfits are still closely tied. Both companies had a stake in the 2003 session.

In past legislative sessions, bills concerning energy and telecommunications regulation were the domain of the House State Affairs Committee. But after Craddick became speaker, he created a Regulated Industries Committee specifically to handle such bills. Hard-line Weatherford Republican Phil King, one of Craddick’s chief lieutenants, chaired the committee. King’s panel mostly served as a bottleneck for legislation. Many a pro-consumer bill withered in the committee during the 2003 session. In contrast, a handful of specially selected industry bills passed quite quickly.

One of those was House Bill 1942 (it later passed as Senate Bill 1271). The legislation allows gas companies and pipeline outfits to charge customers more on their gas bills, at the discretion of city governments, to compensate gas corporations for capital improvements such as repairs or construction to pipelines that perk up service. The rub is that although the legislation was sold as a way for companies to recoup money spent on pipeline and infrastructure improvements, the bill doesn’t limit what expenses gas companies can foist on to consumers. Geoffrey Gay, an Austin attorney who represents several municipalities around the state before the Lege, opposed the bill. He notes that under the new law, a gas company could buy a Lear jet or refurnish a boardroom and attempt to recover those outlays from customers. Gay believes the bill will be a windfall for industry since companies will avoid frequent costly and heated rate cases before the Railroad Commission. He predicts that many cities won’t deny companies’ rate hike proposals, and believes consumers will pay the price.

The bill flew through the Regulated Industries Committee with astonishing swiftness. The Senate passed its version on April 25, 2003. King’s committee received, heard, and passed the bill within five days. Two weeks later, it had passed the full House. “It was clear from the moment I started working on it that they had the votes. The companies had the lobbyists all lined up,” says Gay, who watched eight consumer bills he backed die in King’s committee and a ninth rot in Woolley’s Calendars Committee. “They had all the wheels greased.”

Some companies have already moved to take advantage of the new law. One is the former Reliant division, CenterPoint Energy, which, along with its electricity business, operates two interstate natural gas pipelines. It should also be noted that El Paso Energy, a TRMPAC contributor, also has significant pipeline holdings.

Beyond the pipeline bill, Reliant Resources, the electricity provider in Houston, likely benefited from the death of at least six pro-consumer electricity bills that never emerged from King’s Regulated Industries Committee. The bills, filed by Houston Democrat Sylvester Turner, dealt with everything from price-fixing to granting more enforcement power to the Public Utilities Commission. Turner is speaker pro tem of the House, yet he couldn’t coax these bills out of committee.

The last interview of the day for Lilly and Woolley, according to their itinerary, was with Houston businessman Charles Hurwitz, one of the most powerful financiers in the state and an arch-villain for many environmentalists. Notes next to his name indicate that Hurwitz, the CEO of a holding company called Maxxam, was interested in bolstering the Texas horse racing industry. The notation reads: “horseracing #1.” It also states: “retained Elton Bomer – Talked to [lobbyist Mike] Toomey.” At the time, Bomer was a lobbyist for horse-racing interests. Toomey, who is now Governor Rick Perry’s chief of staff, was working as a lobbyist for several influential clients. A call for comment to Hurwitz’s office was not returned. A month after the meeting, in early October, the Maxxam Inc. Texas Political Action Committee gave TRMPAC a $5,000 contribution.

In a generally sympathetic profile in Texas Monthly in 1994, Hurwitz is credited with bringing racetracks t
Texas. The magazine also noted that business wasn’t exactly booming. “Right now we’re running at about $77 to $80 in daily gambling per person, instead of the national average of $120,” Hurwitz told the Monthly.

Hurwitz quickly realized that he needed other ways to get people to come to the races and part with their money. It would take time, which he bought for himself by declaring the Sam Houston Race Park bankrupt, an area of law with which Hurwitz is quite conversant. By 1997, he was trying to convince the Legislature to allow poker and blackjack at his race park, newly emerged from bankruptcy.

In a rare defeat for a TRMPAC sugar daddy, efforts in the 78th Texas Legislature to allow video poker at racetracks were introduced with much fanfare and then failed to go anywhere. Interestingly enough, today, as the GOP leadership casts about for a way out of the state’s school finance crisis, gambling is looking ever more alluring. (One strong proponent of legalizing some gambling to pay for public education is Comptroller Carole Keeton Strayhorn, who received $50,000 from the Maxxam political action committee in 2003. As recently as January, the comptroller expressed her views on the subject at the Texas Thoroughbred Association’s annual meeting and awards banquet held at Hurwitz’s Sam Houston Race Park.)

While Hurwitz would undoubtedly like to see his gambling ambitions satisfied in Texas, it is on the federal level that he has most needed a sympathetic ear. Fortunately, he and Tom DeLay have a long-term relationship that goes back at least a decade.

In the 1990s, both the Federal Deposit Insurance Corporation and the Office of Thrift Supervision were involved in lawsuits against Maxxam to try to recoup over $1 billion the company had cost taxpayers after a failure of a savings and loan it owned. The Clinton Administration offered to forgive a portion of that amount in exchange for a virgin stand of redwoods, called the Headwaters Forest, owned by Maxxam. It had already offered to buy the forest but Hurwitz had asked for a profit margin of 2,800 percent.

To get banking regulators off Hurwitz’s back, DeLay wrote them “alleging misconduct in the way they were trying to use banking laws to squeeze more trees out of Hurwitz,” according to the Sacramento Bee. By the end of seven years of litigation in the savings and loan case, Maxxam had dished out so much on defense attorneys, lobbyists, and publicists-more than $43 million, or about three times as much as the government-that it wormed its way out of having to pay any meaningful restitution. In February 2002, after a congressional investigation spearheaded by the GOP majority into the conduct of banking regulators, the Office of Thrift Supervision settled its case. The agency had once sought $821 million. It settled for $206,000. The FDIC, in turn, asked a federal judge to drop its case. Maxxam never admitted to any wrongdoing.

The tireless Woolley and Lilly held more special interest meetings than with just Compass Bank, Reliant, and Maxxam. Also on the itinerary for Woolley and Lilly was Ed Segner III, an executive with EOG Resources, a natural gas producer and former arm of Enron. According to the notes on the itinerary, Segner wanted to “take some of the volatility” out of energy policy by addressing the state severance tax. Some energy producers have called for elimination of the tax on oil and natural gas or at least a sliding tax rate. Segner contributed $1,000 to TRMPAC two weeks after the meeting.

Beyond the Houston meeting, a slew of TRMPAC benefactors emerged from the 2003 session with legislative goodies. As the Observer reported last summer [see “Rise of the Machine,” August 29, 2003], Farmers Insurance and AT&T were among the biggest winners during the 78th Legislature. Farmers, which contributed $150,000 to TRMPAC, and other big insurance companies saved millions when the Lege decided not to require mandatory reductions of home insurance rates that had risen, in some cases, by more than 100 percent the previous year.

As for AT&T, its $20,000 corporate contribution to TRMPAC and reported donations to TAB may have factored into the defeat of prized legislation for SBC. Its bill would have essentially booted AT&T entirely out of the Texas high-speed Internet market. It was the first time most Capitol insiders could remember a major SBC-backed bill ever failing to pass.

Not to be outdone, Philip Morris gave $25,000 in corporate money to TRMPAC. The company was surely quite pleased when the Lege chose not to raise the state tax on cigarettes, which many lawmakers had proposed as a way to help close the state’s $10 billion budget gap in 2003.

One of TRMPAC’s biggest backers was the Boston-based Alliance of Quality Nursing Home Care, which donated $100,000 in corporate funds to TRMPAC’s cause. The alliance consists of 14 nursing home companies. Alliance Chairman Steve Guillard told the Austin American-Statesman in December that his organization gave to TRMPAC at the request of two Texas nursing homes that wanted to limit their legal liability in civil lawsuits. Months later, the Lege passed a sprawling tort reform bill that capped liability for many special interests, nursing homes among them.

The big lie of politics is that money doesn’t influence legislation. Traditionally, however, that influence has been somewhat mitigated. A hefty campaign contribution won’t guarantee passage of your pet bill. It simply buys you access. It means a lawmaker will let you come to his or her office to argue your piece of public policy. In theory, the folks who disagree with you likely have donated just as much money to the same politicians and will gain the same access. That’s not how it worked last session at the Texas Legislature. In 2003, it wasn’t politics as usual. Lilly and Woolley’s Houston memo and the subsequent success of TRMPAC benefactors during the 2003 legislative session hints at a staggering level of corruption in Texas augmented by overly safe legislative districts redrawn along partisan lines. “It was not just giving campaign contributions for access on a particular bill,” says McDonald of Texans for Public Justice. “It seems like they were announcing that they were selling policy or selling legislation so they could get money. It just connects a whole broader circle of corruption and power that is totally apart from what you learn in civics class.”

Selling legislation in exchange for campaign contributions is illegal. But it’s quite unlikely that any member of TRMPAC or any lawmaker will be charged with bribery, simply because prosecutors can almost never prove a quid pro quo between campaign donations and legislation. Instead, Earle’s widening grand jury investigation of the 2002 election scandal continues to center on TRMPAC’s possibly illegal use of corporate money on campaign activities. It is unclear how high Earle’s investigation will go. But these scheduling memos appear to have pulled back a curtain on the nature of political power in Texas, and the sight is ugly indeed.

“It is so broad and so ingrained in the political takeover in this state in the last couple of years,” McDonald says. “I hope [Earle] has the time and ability to get into all [its] aspects because it would be very enlightening for the state of representative government in Texas to see who really gets represented and how. Hopefully he will get to the bottom of some of it. Will he get to the bottom of all of it? I don’t know. It looks pretty massive.”

Observer intern Jeremy Brown contributed to this story.

Lilly Goes To Dallas

Three days after her Houston trip, Lilly flew to Dallas on September 12, 2002, according to another itinerary obtained by the Observer. (Legislative priorities are not detailed on the Dallas memo.) That trip brought in $35,000.

In Dallas she joined Rep. Dianne Delisi for a series of TRMPAC fund-raising meetings, this time with powerbrokers from the Dallas area. Delisi has put out a statement refusing to comment while the grand jury is investigating. The two met with Fred Meyer, a former state Republican Party chairman and long-time GOP contributor. Eight days later, Meyer gifted $5,000 to TRMPAC. Delisi and Lilly also met with Jim Lightner, a reactionary who’s supported the campaigns of Pat Buchanan and former Ku Klux Klan grand wizard David Duke. Five days later, Lightner, founder of defense contractor Electrospace Systems, gave TRMPAC $5,000. Delisi and Lilly also solicited money from James Lattimore, owner of Lattimore Materials, which provides ready mix concrete to North Texas builders. Five days after this meeting, Lattimore contributed $10,000 to TRMPAC. In all, he gave DeLay’s PAC $25,000 in the 2002 election cycle, in addition to $80,000 worth of contributions to Greg Abbott. To end their day in Dallas, according to the itinerary, Delisi and Lilly visited with Ebby Halliday Acers, wealthy founder of Ebby Halliday Realtors; later that month, she donated $5,000 to TRMPAC.

Unlike the Houston meetings, however, the Dallas documents lack notes on potential legislation that donors wanted. Delisi later became part of Craddick’s leadership team and chair of the committee on State Health Care Expenditures. -JB & DM