You don’t need a weatherman to know which way the money blows

[in light of the comments about GMCR and state tax “incentives”]

OK this is a bit wonky but it’s instructive and, as they say, the devil is in the details.

As you know, the VT Economic Progress Council (VEPC) gives away millions each year in business “incentives”.  The program has been criticized for years for a variety of reasons.  But even if we accept it on its face, it still has a serious problem.

The methodology used to calculate the award is based on a number of factors, especially the expected number of new jobs.  But the program is only supposed to reward new incremental jobs.  That is, jobs that wouldn’t have been created otherwise.  To ensure this, VEPC uses what’s called the “background growth rate” to discount jobs that would have been created in the normal course of business.

However, the background growth rate is an industry average rather than the applicant’s actual history.  This creates a problem.

more below

Here’s an example: If a widget maker applies for the incentives, VEPC uses the recent growth rate for all Vermont widget makers.  Assume there are ten widget makers in Vermont.  At any given time a few of them will be struggling (perhaps cutting jobs), a few will be stable (profitable but no new jobs), a few will be growing modestly, and one or two will be growing at a good clip.  Therefore, the overall annual industry growth rate may be 2% but one or two widget makers may have been growing at 5% or more per year.  And since the incentives are only paid if jobs are actually created, it stands to reason that the growing firms are the ones applying.  

To extend the example, let’s assume a widget maker with 100 workers promises to create 10 new jobs.  Using a 2% background growth rate, VEPC determines that the company is eligible for incentives based on eight jobs.  But if the firm’s growth rate has been 5%, history suggests that it would have created five jobs anyway and should only receive an award for the additional five.  

So by applying a 2% background growth rate to this hypothetical firm (which is actually growing at 5% per year), VEPC ends up paying for three jobs that would have been created anyway.  Obviously, this is not a fiscally sound practice.  

The problem was identified by the State Auditor in the very first review of the program in 2000 (I was the principal author of the report).  More recently, the Auditor’s 2008 review used a small sample of actual company data to illustrate the problem and recommended that the methodology be changed seepages 23 – 27.

VEPC’s response was predictable and – in my opinion – showed clearly that it is more interested in pushing money out the door than protecting taxpayers.  In its comments, VEPC said that using company-specific background growth rates would be inconsistent and unfair because some applicants are too new to have much history (see Appendix V of the Auditor’s report, pages 72 – 74).  But the change would not penalize newer firms (the industry average would still be used for them), only serve the intent of the statute, which is to not incent normal growth.  Moreover, the Legislature’s desire for consistency in implementation should not be read as a justification for wasting money.  

The statute says that all such methodological issues are within the purview of the Joint Fiscal Committee (JFC) rather than the full Legislature.  The JFC will meet at least twice before the next full session (once just before the newsletter was published) so there is an opportunity to correct the error made years ago.

And the timing is right.  The Administration and the Legislature have both indicated a desire to cut costs.  One would think they would want to fix a problem that has cost taxpayers millions over the years.  This is not a frontal assault on VEPC.  Even if you like the program (I don’t), you should want it to be run responsibly.  

But notwithstanding his supposed commitment to cutting waste, Jim Douglas has not responded to the Auditor’s recommendation (although he doesn’t seem to have a problem cutting programs for the poor).  Let’s hope the Joint Fiscal Committee has more courage.

[this first appeared in the August Peace & Justice Newsletter]

(Very substantive diary addressing Douglas’s proposed cuts. – promoted by Jack McCullough)

she posed the following question re. the decision to close a prison and (presumably) ship more prisoners out of state

“How much does it cost us to export prisoners?  Is that cheaper than running a prison ourselves?”

Doug Hoffer Testimony

House Government Operations

Regarding CCA and the DOC

2 April 2008

We know that the cost of housing a prisoner is cheaper at an out of state (OOS) facility than in Vermont.  But is the comparison apples-to-apples?   If not, the purported savings are exaggerated and could result in bad decisions.  Here are some differences.

1. Corrections Corporation of America (CCA) does not provide mental health services.   DOC has not provided data for the actual cost of mental health services in Vermont prisons.

2. CCA does not provide services related to sexual abuse, substance abuse, or violent offenders.   DOC programs not available through CCA include the Cognitive Self Change program for violent offenders; the Intensive Domestic Abuse Program; Batterers Intervention Program; the Network Against Domestic Violence and Sexual Assault Programs; and the Discover Program for those with substance abuse problems.  

DOC has not provided data for the actual cost of these services in Vermont but they must be substantial.  For example, the treatment programs for sexual abusers include over 100 beds in St Albans, Springfield, and Windsor staffed with 7+ FTE master’s level MH professionals.

3. CCA provides a GED program but, according to DOC, it is not comparable Vermont’s Community High School (CHS).   DOC has not provided data for the actual amount spent by CCA for its GED program or any details about the program.

DOC’s cost for “education” was $3.6 million in FY07.   DOC was unable to say what CCA spends.  When asked to provide comparable figures to reflect the difference in services, DOC adjusted its education costs downward to $1.45 million.  

According to CCA, 120 inmates earned a GED at its Kentucky facility in 2006. But the company did not say how many Vermont inmates went through the program (and DOC did not tell us).  CCA reported that about half the inmates at the Kentucky facility were from Vermont.  But since Vermont does not send inmates under 22 years of age OOS, it is likely that Vermont’s share of CCA GED graduates is less than half the total.  

CHS reported that 148 high school diplomas were awarded in FY07.   DOC describes the CHS as a very substantial program serving hundreds of inmates who log thousands of hours of time in the classroom.  DOC is required to spend the equivalent of the statewide average for public school students (minus trans. & debt service).  Since CCA’s business model is based on cost containment and limited services, the quality of instruction cannot be comparable to the CHS.  

Therefore, without more information, it is difficult to understand DOC’s adjustment from $3.6 million to $1.45 million.  

4. DOC reported spending $13.4 million for medical care – $7,953 per inmate (not including mental health services).   It seems highly unlikely that CCA would spend anywhere near that much since the total annual cost per inmate is only about $23,000.  Thus, notwithstanding the differences due to the economies of scale, there must be significant differences in the health of the two populations and/or the nature and quality of the services provided.  

We asked DOC for information about health care services and costs at CCA facilities, but DOC had none.  When asked, CCA provided information on Vermont inmates’ share of the percentage of total expenditures for medication.  Vermont inmates represented about half the population at the Kentucky facility but accounted for 77% of the total cost for medication (including diabetic, cardiac, HIV, Hepatitis C, and asthma medication).  

The numbers appear compelling but there’s a lot of information missing.  Percentages don’t tell us what the costs are.  For example, 77% of a small amount is no big deal.  And we don’t know whether a significant portion went to a small number of inmates with more serious conditions.  And we don’t know anything about the demographics or medical condition of the Kentucky inmates.  And, most importantly, we don’t (yet) know how the per inmate medication costs for VT inmates in Kentucky compare to the costs at DOC facilities.  The question was about costs, not percentages.

5. The CCA contract calls for the company to provide only the first $2,000 in care outside the facility (it was $20,000). A DOC memo claims this change will cost the state $360,000 per year.   It does not appear that this cost has been added to the published contract costs for OOS prisoners.

6. AHS and DOC staff make periodic visits to the OOS sites for various purposes.  DOC estimated that the cost for FY07 was $139,000.  

All these costs should be taken into consideration when comparing the CCA contract rate and the DOC instate cost.  The bottom line is that a fair comparison can only be made when the characteristics of the population and the services provided are apples-to-apples.  We don’t yet have the data necessary to do this.

CCA only takes inmates who do not need mental health care or specialized treatment programs. And it seems highly unlikely that CCA’s GED program is anything like the full-service high school experience offered by the CHS.  Therefore, it’s not surprising that CCA’s program is so much cheaper; it is the equivalent of an insurance company cherry picking only healthy people.  

What’s the alternative?

We asked the DOC to help explain the differences in the cost structure.  According to DOC, the primary reason is that CCA achieves economies of scale with larger facilities.  This is reflected in Vermont’s figures as well since the larger in-state facilities have lower costs per person.  However, that doesn’t necessarily mean the best solution is to outsource.

Note: CCA also keeps the price down by paying very low wages.  The median annual wage for a corrections officer in Kentucky is less than $25,000.

Every dollar spent with CCA is a dollar lost to the Vermont economy.  On the other hand, if we built a new prison, we would have a fifty-year asset large enough to achieve at least some of the economies of scale we need to save money.  And we would get the short-term benefits of the construction and fit-up (tens of millions in local payroll), as well as the long-term benefit of those continuing expenditures for salaries (money circulating in the local economy).

Having said that, I understand that the annual savings appear to be large. But we don’t yet have an apples-to-apples comparison.  Once we do, the question is how do the savings from outsourcing compare to the benefits of building and operating a new facility? This critical question has not been addressed.

Furthermore, if Vermont continues to rely on CCA for more and more beds, the instate infrastructure (physical & human) will be reduced over time from closures, retirement, and layoffs.  If so, what is to prevent CCA (or another vendor) from raising the price when Vermont has even less capacity?  

Miscellany

Some items in DOC’s report to the legislature that merit brief comments.

• The table at the top of page 26 shows the “Hypothetical Cost of Contracting by Facility”. It says the state could save $41 million by outsourcing all of Vermont’s inmates.  This is not accurate.  As discussed above, CCA does not provide a number of very expensive services.  If they were required to do so, the cost would go up accordingly.  In my view, it is terribly misleading to present this kind of information.

• The second table on page 26 shows the projected contract costs for the “New England Option”.  This too shows tens of millions in annual savings but suffers from the same flaws as the first table.  More importantly, it notes that CCA’s per diem cost would likely rise to $80 from $58, in part to cover the capital costs of the new facility.

I ask you to think about this.  Why should Vermont taxpayers pay for a new prison in another state, to be owned not by Vermont but by a private company?  If taxpayers are asked to pay for a new prison, why shouldn’t the facility and the jobs be in Vermont?  This just makes no sense to me.

• Under “Plan C” (Re-Task Several Facilities), the report states “The correctional facilities serve multiple populations and functions, and intersect with the interests of the criminal justice system, law enforcement, cities and towns, victims, families of offenders, advocates, and taxpayers. Each of these stakeholders has a valid interest in Vermont’s current and future correctional system.” (emphasis added)

Sending inmates OOS does not serve families or advocates.

(It’s great to have so much reader-contributed work on this site. – promoted by JulieWaters)

The VT Dept. of Labor just posted revised job data (“benchmark” adjustments).  As of December 2008, we had fewer seasonally adjusted jobs than in April 2003.

During that period, the state spent about $200 million on “core” economic development (ED) activities.  We also “spent” $200 million on ED-realted tax expenditures (foregone revenue), including VEPC and the 40% capital gains exclusion.  And we spent another $200 – $300 million on dual purpose activities like higher education, ED-related transportation, etc.

So after spending $600 – $700 million, we have fewer jobs.  The point is not that all the money was wasted, only that a state has very limited power to influence the economy and that our current strategy cannot overcome the power of the business cycle.

So the real question is what else could we have done with the money — and what should we do going forward?  Clearly, tax “incentives” and most other subsidies are not long-term investments (many recipients of tax “incentives” have cut jobs).  

On the other hand, we could buy or build hard assets like affordable homes, telecom fiber backbone, renewable electric generation, processing facilities for our growing non-dairy agric. sector, and so on.  We could invest more in energy efficiency, which saves money and helps the environment.  And we could spend more on education & training so workers have the tools they need.  All of these options create jobs, have strong multipliers, and provide the infrastructure necessary for long-term growth and greater self-reliance.

We know the governor will not deviate from his failed strategy.  But the legislature can and must offer a sensible alternative.  There’s no shortage of money; much of it is just being spent on the wrong things.  How much more evidence do we need?

For too long these choices have been made without input from regular Vermonters.  The discussions are dominated by the same interests year after year.  It’s time to tell our elected officials that enough is enough.  We can do better.

The Chair of the House Commerce Committee is open to new ideas.  I encourage you to send a note to him and other members of the committee.

BTW – Jason Lorber (Burl.) and Chris Bray (New Haven) have submitted a very good bill that represents a more thoughtful and focused approach to agricultural development [H.231].  It’s a modest beginning but we need to support it.  And we need to tell the legislature that contrary to what they hear, we’re not anti-business.  We’re just tired of Trickle Down.  

As you know, this is a tough road.  The “usual suspects” have considerable influence and will not go away without a fight.  But economic development cannot be left in their hands any longer.  For a variety of reasons, there has never really been any organized effort to break into the circle.  I know, it’s boring, it’s complicated, and everyone has other things to do.  But it will never change unless we tell legislators that we will no longer support business as usual.  Please help if you can.

See the list of committee members and e-mail addresses below.

HOUSE COMMITTEE ON COMMERCE AND ECONOMIC DEVELOPMENT

Kitzmiller of Montpelier, Chair  

wkitzmiller@leg.state.vt.us

Marcotte of Coventry, Vice Chair

mmarcotte@leg.state.vt.us

Shand of Weathersfield, Ranking Member

eshand@leg.state.vt.us

Bissonnette of Winooski

cbissonnette@leg.state.vt.us

Botzow of Pownal

bbotzow@leg.state.vt.us

Clerkin of Hartford

jclerkin@leg.state.vt.us

Dickinson of St. Albans Town

edickinson@leg.state.vt.us

Lorber of Burlington

jlorber@leg.state.vt.us

Smith of Mendon, Clerk

msmith@leg.state.vt.us

Turner of Milton

dturner@leg.state.vt.us

Wilson of Manchester

jwilson@leg.state.vt.us  

(This is a big deal. – promoted by JulieWaters)

I sent this to the Senate Economic Development Committee today

“It appears that the latest version of Sen. Hinda Miller’s economic development bill would lower the wage threshold for the “economic growth incentive” program (VEGI, administered by VEPC [Sec. 11 amending 32 V.S.A. § 5930b(24)].  I can only hope this is a typo.

At present, new jobs supposedly created by the “incentives” must pay at least 60% more than the minimum wage.  Personally, I think that’s too low, especially since the Leg. changed the definition of full-time to only 35 hours last year.  That means a job could qualify if it paid $23,478.  I’m not sure why the taxpayers should provide “incentives” for jobs that pay $13,000 less than the statewide average wage.

So it’s shocking that the bill now says the wage threshold need be only 20% above the minimum wage.  That means jobs that pay as little as $17,604 will qualify.  This is madness.  

Vermonters with jobs at that level qualify for a number of public assistance programs.  So in addition to giving employers money to create low wage jobs (often jobs they would create anyway), this bill would add to the cost by increasing demand for public assistance.

Who asked for this?  What is the justification?  How can this possibly be considered in the best interests of workers or taxpayers?”

[Note: This undoubtedly came from the Exec. Dir. of VEPC, who is a state employee (appointee) reporting to Commerce Sec. Kevin Dorn (and the governor).  This is what passes for economic development in the minds of our corporate welfare ‘Dads’.  Give millions to low wage employers.  It is especially disturbing (immoral?) at a time when the Leg. is thinking about cutting programs for the elderly, kids, and the poor.  These people have no shame.]

OK, it may be old but it’s still good

who remembers the Sloganator?

brilliant use of the 2004 GOP web site to build your own Bush-Cheney poster

isn’t it time for some of the creative GMD’ers to do the same for Jim Douglas?

you know he wants it

he certainly deserves it

http://www.scuzzstuff.org/slog…

(Mr. Hoffer saves me the trouble. I’ll just add that this nonprofit schtick is the lamest, tackiest, and one of the more desperate Republican change-the-subject lines of attack I can remember for a long time. – promoted by odum)

Rep. O’Donnell’s call for non-profit executives who earn more than $60,000 to take a pay cut is a perfect example of Jim Douglas’ cynicism.  Attack (some) non-profits, ignore the elephant in the room, and divert attention from the core issues.  Let’s talk about “shared sacrifices” shall we.

The 40% capital gains exclusion has cost the state $160 million in only four years (2003 – 2006).  Yet the Gov. is focused on saving a few hundred thousand dollars by attacking non-profits (except I think they may have left out UVM and FAHC).  And what about the $300 million in personal contracts to consultants?  Many of whom earn hefty hourly wages (including the Snelling Center, a favorite of the Douglas administration).

And what about executives in the for-profit firms that do so much business with the state?

The fact that the VT media is giving so much time & ink to Rep. O’Donnell is shameful.  C’mon people, why do you give these folks a free ride?  

Although the analogy is stretched, I find myself thinking of the lawyer (Joseph Welch) who said to Sen. Joseph McCarthy during the Army-McCarthy hearings in 1954:

[Gov. Douglas] “Have you no sense of decency”?

the Governor is concerned about the number of non-profits in VT and suggested that they consider merging to reduce costs (way to really focus on the core of the budget problem)

if we follow this logic, many VT towns would be well advised to merge; it’s so inefficient (and inconsiderate) for them to waste money being separate jurisdictions; and what about all those small businesses? oh wait, the Governor supports Wal-Mart so there will be fewer small businesses going forward; and how about all those tiny churches that don’t pay property taxes? couldn’t they come together and free up some of that land for more important stuff?

Jim Douglas is an unemployment machine and an embarrassment to this state  

(Doug– if you e-mail me the graphs, I’ll edit them into the diary. – promoted by JulieWaters)

this is a memo I sent recently to legislators on House Ways & Means, Senate Finance, House Commerce, and Senate Economic Development; it concerns the Financial Services Tax Credit program (a gift from Howard Dean to one of the Chittenden “Bishops” Harlan Sylvester, a securities broker AND a political broker)

note: unfortunately, I cannot figure out how to post the graphs, but I think you’ll get the point; especially when you read the last paragraph

note also that this is an opportunity to save money (or at least redirect it) that those who bitch about “welfare fraud” are loathe to acknowledge

TAX INCENTIVES REVISITED

As you consider what to do with the VEGI tax “incentive” program, I offer the following cautionary tale. Although not a perfect analogy, the Financial Services tax credit program (which was mercifully allowed to sunset) illustrates the risks of such a strategy.

The three graphs at right show job growth before, during, and after the program. In all three sectors, growth was positive before the program and generally continued with little change (except for Holding Companies where one firm bumped the number in `97).

Two of the three sectors grew during the market expansion in the late `90s but leveled off or declined with the recession (and one grew a bit after the program was scuttled). This shows why tax “incentives” are not long-term investments. Market conditions are much more important than taxes.

Here is the tale of the tape: job change by NAICS code.

523  32 more jobs then in `01

55111  22 fewer jobs then in `01

525  42 fewer jobs then in `03

So after spending over $10 million in foregone revenues, we have 32 fewer jobs now then before the last recession. And this data is from the 2nd quarter of 2008 (latest available). It will only get worse when the figures for the 2nd half of 2008 are published. And they call this economic development?

The graphs as Doug e-mailed them to me –Julie

Clicking on them gets you a version twice the size.

( – promoted by odum)

I’m saddened and embarrassed by the Governor’s speech today. But I’m also angry that he continues to lie to the people of this state. For example, he said

“Vermonters have no capacity for higher taxes – another approach advanced to shore up state coffers.”

Is that ALL Vermontes Governor? Here are some pesky facts.

Since 2003, the number of filers reporting more than $500,000 in adjusted gross income (AGI) has more than doubled and their income has tripled to almost $2.3 billion. Big deal right. But here’s the kicker. In 2003 those earning over $500,000 paid 5.9% of their AGI in state income taxes (not much when you consider our top marginal rate is 9.5%). But in 2007 this group paid only 5.4% of their AGI in state income taxes. That’s right. The percentage of income they paid in state income taxes WENT DOWN!!

So tell us again Governor how “Vermonters” have no capacity for higher taxes and how we’re chasing the wealthy out of VT.

I don’t know which is more disturbing: Governor Douglas’ dissembling or the media’s failure to call him on it.

(I like it! – promoted by JulieWaters)

There is at least one idea that I have not heard among the options discussed for closing the budget gap. Namely, increased resources for enforcement at the Tax Department.

A recent report (Univ. of Michigan & IRS analyst) estimated that people earning between $500,000 and $1 million failed to report 21% of their income.

http://www.bus.umich.edu/otpr/…

If this is true in VT, it would represent $147 million in unreported income just from this group. The yield on this level of income is about 5.6% so we could be losing as much as $8.2 million per year (not counting loses from those with even higher incomes).

For perspective, an earlier IRS report using the same data estimated the federal “tax gap” at $345 billion (the difference between taxes owed and taxes paid). National Research Program Individual Income Tax Reporting Compliance Study for 2001

http://www.irs.gov/newsroom/ar…

I’ve heard other states have achieved solid rates of return on increased funding for enforcement. Shouldn’t we do the same? It has to be better than cutting programs for kids & elders.

And I would love to hear the Governor tell us why this wouldn’t be appropriate / affordable / necessary. C’mon Jim, tell us why we can’t do this.