The State’s Job Problem Can’t Be Fixed By Changing Just One Thing

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Charlie Arlinghaus

September 17, 2014

As originally published in the New Hampshire Union Leader

The biggest problem with the anemic job growth New Hampshire has been saddled with for the last decade is not the lack of jobs but the forlorn hope of policymakers that there is one silver bullet that will fix everything.

It used to be true (and is no longer) that New Hampshire grew faster than most states when the economy was strong and came back from recessions before other states and more aggressively than other states. The explosive growth of jobs in the 1970s, the 1980s, and at least to some extent the 1990s was something we took for granted and defined what we perceived as the dynamic economic character of the state.

In the 1980s, New Hampshire’s economy went through an explosive boom cycle. At our job creation peak there were more jobs than available workers – we were the North Dakota of our time. For example, from 1983 to 1989 the number of jobs in New Hampshire increased by 28% in just six years.

That kind of an explosive jobs boom will create opportunities for entry level workers, improve the chances for good workers to move to better jobs faster and more regularly, and makes for a generally comfortable society.

Even booms didn’t make us immune from recessions and we went through a slow time. Our growth in the 1990s after the early decade recessions was 14% over six years – about half of the boom 1980s but still quite strong.

The policy challenge of recent times has been that even that more mature growth has not returned. We had the same number of jobs at the end of 2013 as we had eight years earlier despite a growing population. Two recessions over the last fifteen years have hurt but we no longer experience strong growth coming out of the recession. No one writes anymore that “New Hampshire led New England out of the recession.”

That frightening job situation leads policymakers to routinely ask “what’s the one thing you would do, the one change you would make, to promote job growth?” The right answer is to tell them it’s the wrong question. The one thing I would do is to try and convince lawmakers that there isn’t one thing.

Anyone who says cut this tax, pave this road, fund this program and all will be well is naïve. New Hampshire has become less and less competitive but not by making one big change that can be reversed. Nor do businesses locate on the basis of one factor alone. A business looking to compete with other businesses looks at dozens of factors and their cumulative fiscal and psychological effect. Our state government needs to be the same.

It is true without question that business taxes have gotten to a troublesome place. The Tax Foundation finds New Hampshire among the worst states in the country in the business tax component of their competitiveness index. That means that businesses making tax burden a significant consideration will frown on us. The bad news is that economic development professionals will almost uniformly tell you that the first question any potential business they are recruiting asks is about taxes.

But it isn’t just business taxes. Our unemployment taxes are quite high. The workers compensation rates that businesses are required to pay are among the highest in the country here. The cumulative effect of seeing each of those things on a spreadsheet is that New Hampshire begins to lose a bit of the “low-tax New Hampshire” reputation that defined our brand in the 1980s and 1990s. The psychological effect of that reputation goes well beyond the totals and averages of any particular spreadsheet.

But any business will tell you that there are other factors like the cost of doing business. New Hampshire ranks 49th in the cost of health insurance. Only Massachusetts is higher. Family coverage here is about 20% higher than in average states – states we compete with for jobs.

More troublesome are our electric rates. A lot of the high tech and manufacturing jobs we want to attract use a lot of electricity. It’s not clear why any concern which uses a lot of electricity would even consider New Hampshire. Our rates for industrial users are more than double what the 10 or 15 most competitive states charge and higher than all but a handful of neighbors.

No one thing will change our competitiveness nor are the handful of things I’ve mentioned the only ones that matter. But if we want jobs for our kids we need to pay attention to many details or just tell them to move to Texas.

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Why is the Government Hiding Its Problem From Us?

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Charlie Arlinghaus

August 13, 2014

As originally published in the New Hampshire Union Leader

The state budget is in shambles but that information is not being shared publicly. To guess at the nature of the overspending and budget shortfall, we can only estimate using some incomplete public documents. This problem can be resolved by the quick release of information the executive branch has but is not sharing. Longer term spending should be made transparent in a timely fashion in exactly the same way revenues are currently transparent.

For months now Concord has been awash in rumors of a significant budget shortfall.  The governor has already said she expects the state spend more money than the budget allows. Yet despite what would ordinarily be seen a crisis, no further or complete information has come out. Senators including Senate President Chuck Morse and Finance Chair Jeannie Forrester have repeatedly asked for a spending update from the executive branch.

But such is political life in this day and age that – probably because the two senators are from the opposing party to the governor – that information is not being released. Suspicion and gamesmanship accompany every information request and guide too many decisions.

On the revenue side of the equation, politics is not involved. We know precisely how much money the state has collected from us. Each month, the state publishes and posts on the internet a list of how much the various taxes raised, how it compares to last year, and how it compares to the budget itself. Budget watchers follow those numbers intensely.

But revenue tells us nothing if we don’t know what’s going on with its dance partner, spending. If we raise a little less but also spend a little less, everything is fine. If we raise a little less but spend a little more that’s a problem.

What we know about state revenue is that the estimates were remarkably accurate. The state estimates as part of the budget how it much expects each tax to collect and then uses that estimate to budget spending. Overestimates are a nightmare. But this year the state collected one-tenth of 1% more than its estimate – the statistical equivalent of a bullseye.

That should be good news but rumors of overspending worry any believer in fiscal responsibility. If there were monthly estimates of spending we would know now and would have known for months where things stand. State law requires those estimates to exist but not to be made public.

State statute titled “Execution of the Budget” (RSA 9:11) requires Accounting Services to report to each state agency “once each month” the total amount spent that month and year-to-date. If there is a problem, the executive branch knows. That’s why the governor can predict overspending even though no public documents exist and nothing has been shared with the legislature.

The law should be changed to require spending updates placed online just as revenues are. In the meantime, we have a right to know if our budget is in crisis. Why is this information not being shared?

What we do know about the budget comes from the largest and most complicated department in state government. Because Health and Human Services accounts for about half the state budget unique pressures are placed on them. One of their responses is to present regular updates even when the news is bad. Their monthly “dashboard” is presented to the legislature, full of statistical information, and includes budget updates.

Commissioner Nick Toumpas should be applauded for his effort at transparency but his dashboard is depressing budget news.

Every year that department struggles to comply with service mandates but also significant pressure to spend less money while reducing no service. Governors and legislatures routinely push decisions of what to cut over to the department: “I don’t want to cut anything but you guys find an extra $40 million in cuts somewhere.”

The most recent dashboard predicts the department will end the final accounting having spent $30.9 million more than the budget in the fiscal year just ended and will be another $71.2 million over budget for the current fiscal year. If these numbers – the only ones we have to go by – are correct then half of the budget will be overspent by $102.1 million despite revenues being right on target.

If the hole is that big – and that’s a big hole – why have no steps been taken to curtail spending and eliminate the deficit? Why are we not being told anything yet? Problems don’t go away just because you hide them from the public.

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Taxation Can Only Happen With Representation

Charlie Arlinghaus

July 30, 2014

As originally published in the New Hampshire Union Leader

New Hampshire has had and continues to have a problem with administrative tax increases. Taxes, the removal of your money from you by force of law, is a fairly aggressive governmental act and should only take place through legislation debated openly and acted upon by elected officials directly accountable at election time. Unfortunately, administrators are sometimes encouraged, directly or indirectly, to act so that legislators don’t have to.

The idea of administrative tax hikes taking the place of legislation is something we’ve had to talk about often in New Hampshire. In a 2005, I sounded an alarm titled “Bureaucratic tax proposals subvert the democratic process.” A more recent piece a few years ago had the more descriptive title “Taxes should be voted on not snuck in through regulation.” Yet despite my incessant diatribes, we are faced with these issues again.

There is currently a dispute between the governor’s administration and some Republican state senators about whether a proposed regulatory change would have the effect of extending the Real Estate Transfer Tax to things it does not currently apply to. Whether that is a tax hike or an obscure administrative change ought to be obvious. Sadly, it is a dispute all too common in our recent history.

Tax laws are not always as easy as “pay 9% of this purchase.” The legislature may pass a law intending to tax certain things. They then explain in both the law and in regulation how to calculate which things are included and which are not. So far, so simple. But then human nature rears its ugly head.

It is easier for lawmakers when they have more money during budget season. With more money, they say no fewer times, have fewer difficult choices to make, and have to decide less often between interests competing for the same dollars. However, simply raising taxes and taking more of our money is not politically palatable. Apparently voters – the people who decide whether or not the lawmakers return – react negatively to having their taxes raised.

Some clever politicians though have figured out what might be called an end around. One way they can see more money but not technically vote to raise taxes is to get an administrator to “close a loophole” or “clarify the application of the tax.” Both of these things seem reasonable but both are open to abuse.

A loophole may exist because of an error in language that didn’t capture legislative intent. But more often, the tax was only applied to certain things and other categories were left out. What gets described as a loophole is merely an attempt to extend the tax to things the original law didn’t plan on.

As a matter of tax policy, it is not unreasonable to take a tax and make sure it applies to everything in its category equally – all restaurants not some, all of a particular kind of service or property, some categories but not others. Occasionally, advances in commerce can lead to some descriptions being outdated. But rewriting the tax code, changing the law or the moral equivalent of the law, requires accountability.

Too often lawmakers in need of money will ask an administrator to draft a change and will find it easier to have that change made quietly and without legislative hoopla or too much public notice. In 2009, lawmakers crafting a budget had a gap on the last day when the revenue commissioner came in with a multiple page shopping list of changes that might be pushed through on the last day without benefit of public hearing or discussion. This was a godsend to lawmakers who wanted to raise revenue in a way that they could describe as not raising taxes (about half the changes were made and half were not).

This is not a nefarious action on the part of the administrator any more than the recent actions by Gov. Hassan’s commissioner are nefarious. Instead is part of a horrible tradition: you make the change so we don’t get blamed.

The solution to this game is simple and obvious. If any regulatory or administrative change has the effect of taking something not currently taxed and now taxing it, that change must be proposed by the legislature, go through the process of a hearing, and be voted upon. Without a vote by the people who we elect to act on our behalf and can also toss out, no new taxation can or should exist.

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Does Concord Have a Big Spending Problem?

Charlie Arlinghaus

July 9, 2014

As originally published in the New Hampshire Union Leader

In the last year, the state didn’t have a tax problem but it had a large spending problem. The government collected taxes from us in almost exactly the amount predicted but it appears to have spent significantly more than the budget allowed it to do. The result is a budget hole the precise size of which is still unknown in Concord. The problem is not a shift in the economy or any circumstance beyond our control. Rather, it was an inexplicable failure to manage according to the financial rules laid down a year ago.

New Hampshire passes a two year budget plan which has to balance not each individual year but the total two-year cycle. Spending rules are set down in the budget law and are balanced by an estimate of how much each tax will raise over the course of the next two year. Typically budget inaccuracies stem from the difficulties estimating economic conditions and tax collections.

This budget year that hasn’t been a problem. The revenue estimates for the fiscal year which ended June 30 were remarkably precise. In fact, we raised $5.8 million more than estimated – a variance of just one-quarter of 1%. Any year in which we are right on target on the estimated portion of the budget is typically a good year. This year, however, is an exception.

Spending is supposed to be a precise amount. Departments and agencies are given an amount they may not exceed. That amount is specified in three ways. First, most individual line items have an amount that may not be overspent (this agency may spend only $400,000 on in-state travel, for example). Second, in most budgets many departments are given additional targets to reduce according to managerial discretion (notwithstanding the line item amounts, agency spending must be reduced an additional $400,000 in the ways that make the most operational sense to the manager). Finally, we know that every department and agency will spend a little less here and there than the maximum and therefore “lapse” a small amount back (in other words, not spend it). The example would be spending $392,000 on in-state travel – 2% less than the agency’s allotted $400,000. The exact amount of lapses is specified so keeping track of and managing the amounts is a managerial responsibility.

Once a budget passes the legislature, the management or execution of that budget is an executive branch responsibility. As of this writing, only the executive branch has an idea how close they are to their target. While most budgets can be counted on to underspend by a few dollars, the worst kept secret in Concord is that this budget was overspent. The exact amount is yet to be announced and is unclear even to the legislature.

One reason to worry is that the current budget gets worse and worse as each year goes by. The two-year budget was only able to be balanced by carrying forward a $56.9 million surplus from the prior two-year budget. In the first year (the one that ended June 30), the budget had planned to spend more than it would raise by reducing that surplus down to $26.7 million. The second year would spend down the rest meaning each budget year planned on spending almost $30 million more than it raised.

If spending mistakes this year further erode our fiscal position, next year may well be untenable and require significant spending cuts before the year is too far underway.

Another worrisome thing is the politics surrounding “extra money.” Although the budget as passed spends $56.9 million from prior years, final audits showed an additional $15 million in surplus that is not yet spoken for. The Senate wanted to save it in the rainy day fund as the law would ordinarily require. The governor and the House wished instead to spend it this year. They couldn’t agree so the money remained unspent but not locked away.

There is a concern that clever politicians will have run an end around the legislative process by merely letting some departments overspend by the same $15 million (and perhaps the extra $5.8 in revenue) and thereby achieve the spending increase they were unable to pass legislatively.

That concern may be overly cynical but at this point all we know is that the tax side of the budget was fine, nearly perfect in fact. The spending side is a mystery. The mystery should be revealed as soon as possible if only to put the cynics out of their misery.

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Helping Businesses Make a Rational Choice For New Hampshire

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Charlie Arlinghaus

July 3, 2014

As originally published in the New Hampshire Union Leader

Please forgive me for returning once again -on the heels of last week’s column with the epic headline-to the subject of jobs in the Granite State, but the issue of jobs is more important than any other issue we face and is an area in which we continue to fail. No one wants a future in which New Hampshire is a lackluster economic backwater but that’s the track we’re on. A true economic recovery plan depends not on rhetoric or gimmicks, one bold idea, nor government “investment.” Recovery rather requires a comprehensive commitment to developing the right climate.

I’m regularly asked “what’s the one thing you would do to improve our economic competitiveness?” The first thing I would do is to try and get people to stop thinking that way. There isn’t one thing standing in our way. No governor or legislator will come up with the one silver bullet. Climates and reputations don’t come from doing everything just like everyone but with one magic tweak.

Businesses make rational decisions. As a state we can influence those decisions through reputation but most of all through competitive advantages. Historically, New Hampshire had a reputation for being business-friendly, fair, and economically quite competitive. That reputation is significantly diminished on nearly every count.

Before any business location professional got around to doing spreadsheets, they each started with the notion in their mind that New Hampshire was “an island of economic freedom in a Northeast sea of socialism.” No doubt this was an exaggeration but we had been able to build a reputation contrasting a low-tax reputation with our neighbor known throughout the country as Taxachusetts.

In both the 1980s and 1990s we were seen as using economic growth to lower the Business Profits Tax – the most obvious signal to potential businesses of our attitude. Three reductions in the 1980s lowered the tax from a high of 9.56% down to 8%. The 1990s reform that included the Business Enterprise Tax was a net tax cut and lowered the marginal rate again in two steps down to 7%. Both periods of cutting were followed by periods of extraordinary economic growth – more jobs, more higher paying jobs, more economic opportunity.

Recall that the late 1990s and turn of the century is when our stagnation began. We tripled the low rate of the Business Enterprise Tax and passed two separate increases in the profits tax. Today our tax is 8.5% while the tax in so-called Taxachusetts in only 8%.

However, it is important to note that tax changes are not the only thing that matters. Businesses want lower costs and lower taxes but they also care about regulation and the general attitude toward business issues.

New Hampshire is not unfriendly toward business but we do currently have a reputation for being not quite the same state we were. Regulations and fees are seen to be nickel and diming businesses. Recall the late 2000s when more than 100 different fees were raised. None was particularly burdensome in and of itself but they lent themselves to a reputation.

I’ve spoken for a couple years about creating, perhaps within the governor’s office, a council on competitiveness. So much of the administration is charged with enforcing the administrative regulations that have accumulated over time. It would be sensible to have a task force charged with comparing and contrasting regulatory structures of ours and other states, examining the precise ways in which businesses are forced to interact with the government and its regulations.

In Kansas, the governor created something like this and called it the Office of the Repealer. Rather than new programs or new ideas, Governor Brownback found laws and regulations to eliminate.

There is no reason we shouldn’t examine every business cost, find the ones in which we aren’t competitive and act specifically to change that. Two big examples illustrate the point. Our electric rates are double what they are in the lowest cost states. No high electric use business should currently consider New Hampshire. Yet electricity policy discussions rarely focus on reducing rates by 40% or 50%. It’s as if we concede those businesses to other states.

States can put out a welcome mat for new business and expansions by showering the potential business with gifts or creating an inviting climate and a friendly reputation. Economic development professionals will tell you the first question every potential business asks is about taxes with regulation and reputation following closely. We have to work harder but we can be nimble, frugal, and accommodating to restore the economic growth that once did and will again define our economy.

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New Hampshire is Comfortably Mediocre

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Charlie Arlinghaus

June 25, 2014

As originally published in the New Hampshire Union Leader

When did New Hampshire stop being New Hampshire? Whether one describes New Hampshire’s economy as mediocre, stagnant, or lackluster there is no denying that the latest economic news shows that we are no longer leading any economic charges but instead content to hope some crumbs drop from the tables of others. Once the envy of our neighbors, we may now be stuck as an economic backwater, another nondescript pea in the New England pod.

A terrific piece from Ben Leubsdorf in the Wall Street Journal this week speaks of the uneven recovery. The country as a whole has technically recovered: total jobs have come back to where they were prior to the recession. But recoveries are uneven with some winner states and many loser states.

That economic reality is familiar to Granite Staters. We count on it. New Hampshire is typically said to lead the region out of the recession. We mean that when jobs return, they return here first and we end up with a growing economy at the expense of more lackluster states. But that’s the old reality.

Today, we are comfortably mediocre. Five years after the recession technically ended, jobs have finally reached their pre-recession level again. But in 17 winner states, jobs are actually much higher while in 33 mediocre and stagnant states jobs are still down from their peak. New Hampshire is a loser – not an aggressive job exporter like Michigan but lackluster and definitely in the loser category.

States like Texas are scooping up jobs – Texas didn’t just recover, they’re up about 900,000 jobs higher than their pre-recession peak. They recovered strongly at the expense of states like Michigan (down 566,000), Ohio (down 155,000), and New Jersey (down 157,000). This represents a long term transfer of people, energy, and economic wealth from loser states to winner states.

This competitive dynamic used to be our friend. Post-recession expansions grew New Hampshire and confirmed our economic strength and power. Now, we don’t even outpace our mediocre neighbors. New England as a whole is about even but the power has shifted in our region. Massachusetts is now up about 80,000 jobs from its pre-recession peak while the other five New England states are all still below  their pre-recession peaks by a combined total of about 80,000 jobs.

What a weird and wacky world we live in when Massachusetts thrives at our expense.

I think part of the problem is that New Hampshire has become complacent. It is part of the mythology of our state that we are competitive and that businesses will naturally want to come here. If we think that – and most policymakers do – real competition passes us by.

There are two paths to competitiveness. One is to try and buy friends: to use incentives and gimmicks to induce companies to locate here. This strategy is often pursued by the largest states. They create incentive packages which usually grant the new arrival special treatment or tax relief that is not available to other companies who have the misfortune to actually like our state and locate without the bribe. The theory is that special incentives will lead to so many jobs it is worth the cost and disparity.

We read about this every time an auto manufacturer wants to build a new plant and Georgia and North Carolina start falling all over themselves to shower BMW or whichever company with state largesse.

New Hampshire can not and should not compete this way. First, we can’t afford it. The largest state economies are 20 and 30 times our size. If we enter a bidding war, we’ll lose. In addition, such special treatment violates a long standing tradition of fair play – we treat all taxpayers the same regardless of whether the current government is particularly fond of them.

We have to acknowledge that we are a very tiny piece of the American economy. Companies must compete in giant markets like California and Texas. Even Massachusetts is the 12th largest state economy. Tiny little New Hampshire may be twice as large as Vermont (the nation’s tiniest economy) but we are less than one-half of 1% of the country’s economy. No one has to be here.

We are increasingly uncompetitive in multiple areas of tax policy (notably three categories of business taxation) with high health, labor, and energy costs. There are worse states but our goal shouldn’t be “not as bad as some.” No policy is half as important as admitting our failings and trying to again become the growth engine we were in the 1980s and 1990s.

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Budget Problem About Teamwork and Turkey

Charlie Arlinghaus

June 11, 2014

As originally published in the New Hampshire Union Leader

DRED Commissioner Jeff Rose made a strong plea last week for his economic development bailiwick.  His rationale, however sensible, minimizes a very real problem and is an accidental example of the problem state government faces. The state faces a real problem, one they know about even when denying it, and can’t fix it without a team pulling on each and every oar, not with selective paddling.

The state may or may not face a budget crisis depending on who you believe. In the face of what she thinks is a crisis, the governor imposed the mildest of spending restrictions on every part of state government. Until we know the problem better, she decided to impose the time honored first step: a freeze on new hiring and out-of-state travel. It doesn’t save much money in the short term but it’s symbolic.

Very quickly, some criticized the governor because while out-of-state travel is banned, she herself will still go on a long planned trade mission to Turkey. While there is clearly a political element to the brouhaha, there are lessons to be learned whether the travel goes forward or not.

DRED Commissioner Jeff Rose, the state’s leading economic development official (and, I should add, all around decent guy and a friend of mine) took to the state’s newspapers to defend the Turkey Trip as appropriate, good for economic development, and mention that the state budget situation really isn’t very bad.

Commissioner Rose makes a good case for the value of trade to the state’s economy and the utility of missions such as this in developing business. He sounds like a good commissioner who has thought through the strategic value of a trip and can successfully engage in its defense. But, on some level, Rose’s skill is part of the problem.

Every commissioner and director has – usually – good cause for their individual program. Whether they communicate as effectively as Rose does or whether their trip holds the obvious appeal of a trade mission, most state managers have a good reason for their travel or new hire. The appeal of the trip or the persuasive power of the guy making the argument for what goes on in his bailiwick ought not influence our opinion.

The simple fact is that, despite the Commissioner’s attempt to minimize the fiscal turmoil of the state, we face a real problem.

Revenues, which we track on a monthly basis are in fact more or less right on budget. They are $0.8 million ahead of budget so therefore some would claim there is no issue. But two short months ago (nine months into the first fiscal year of the two-year budget) revenues were $25.5 million ahead of schedule. The rapid deterioration of revenues is not “mildly troublesome” but rather “quite alarming” to any serious budget watcher.

And yet revenues are the most optimistic half of the story. State spending is more than a little scary. Remember that to balance the budget, the executive branch must manage spending in such a way that they do not spend or “lapse” $50 million. The governor herself told the legislature’s fiscal committee that we are very unlikely to come close to meeting our budget target.

Add together deteriorating revenue numbers and spending well above budget and you get a budget problem. And I haven’t even added in the costs that will get carried forward to next year to pay for the MET lawsuit settlement.

Budget crises come and go in New Hampshire but there is only one way to solve them: together. I told legislative leaders in 2011 that real spending cuts were necessary but possible only if everyone on the team shared in the effort. Everyone must cut or everyone will battle to be the exception. That same dynamic should apply to the current situation.

Many spending ideas sound quite sensible on paper especially when advocated with Commissioner Rose’s eloquence. But if constraints like travel freezes and spending freezes are to be imposed they must apply to everyone. The more important and glamorous trips should not be an exception but a leadership example of everyone being in the boat together.

Perhaps we were too far down the road to Turkey to cancel – plans already made, etc. But that’s a different argument than “this project is really important compared to the other boring stuff the state does.” Going forward, all parts of the government, however exciting or well argued, should be part of fixing a very big problem by sharing in the travails.

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Legislative Audit Finds Nearly $1 Million Worth of Mismanaged Tax Credits

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Josh Elliott-Traficante

June 2014

As reported in the Nashua Telegraph, a Legislative audit of the Division of Economic Development, within the Department of Resources and Economic Development found that in 2011 and 2012, $875,750 was improperly given out as tax credits, while an additional $121,000 worth of tax credits were not given to business that were eligible to receive them. This mismanagement accounts for nearly half of all the tax credits granted by the Division. The specific programs in question are the Economic Revitalization Zone (ERZ)[i] tax credit and the Coös County Job Creation (CCJC) tax credit, both administered by the Department of Resources and Economic Development (DRED).

The ERZ tax credit is awarded to businesses that make capital improvements and create new jobs in specifically designated areas. Each year a total of $825,000 worth of credits are available. If there are more applications for credits then there are available, each applicant gets a proportional share. The Coös County Job Creation tax credit is designed to encourage full time, year round jobs in said county.  The applying company is eligible for up to $1000 per job created, and there is no cap on the total number of credits issued each year.

The audit found irregularities a total of 23 of the 29 applications for ERZ tax credits. 19 were found to not have qualified to receive the credits, while a further 4 should have received more. Of the infractions detailed:

  • 4 were awarded to businesses located outside of Economic Revitalization Zones, totaling $237,400.
  • 4 were awarded for employees who were not hired in the applicable year, totaling $81,000
  • 4 were awarded due to basic calculation errors, totaling $17,400
  • 3 were awarded based on incomplete paperwork, totaling $305,100
  • 3 were awarded the limit of $200,000, when the limit should have been $240,000
  • 1 application missed the deadline, but was awarded $188,200 in credits for the following tax year, in violation of the law.

For the 28 applications for the Coös County Job Creation tax credit, 7 were found to not be qualified to receive credits.[ii]

  • 1 was awarded $11,800 for employees retained during a takeover, which is not permitted
  • 6 were awarded for part time employees totaling $6,500. The credit explicitly requires employees to be full time.
  • 2 were awarded $1,500 for employees making below the minimum wage, in violation of the terms of the credit.

According to the auditors, one employee was responsible for reviewing and approving all of the applications.

From the report, it appears that these issues are due to a lack of oversight and competence rather than corruption. The auditors noted several problem areas, including a lack of controls over the application and award process, as well as a lack of safeguards to ensure compliance after the credit has been issued. For example, if a business was received a credit, but ended up cutting jobs, or moving out of state, there is no recourse for the state to get that money back.

The final recommendations include developing administrative rules for regulations, standards and forms relative to the tax credits and implementing policies that ensure adequate controls over calculating and awarding tax credits, consistent application of the same criteria, reviews, and obtaining supporting documentation to calculate tax credit awards.

The Division, to their credit, agreed with the recommendations and is taking steps to correct the problems with the tax credit programs highlighted by the audit.

Click here to read the report in its entirety.

[i] The list of all ERZs in the state, by municipality http://www.bnncpa.com/assets/uploads/general/NHincentivesapndx.pdf

[ii] Note: Some applications had multiple infractions.

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Trying to Make Sense of a Mediocre Deal

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Charlie Arlinghaus

June 4, 2014

As originally published in the New Hampshire Union Leader

The brokered deal on the Medicaid Enhancement Tax and lawsuit is a partial solution to an imperfect situation that will require difficult choices but it may still be the right choice to make. The complexity of the tax and the schemes surrounding it make evaluating and understanding the tax, the choices, and the possibilities difficult but let’s give it a try.

The Medicaid Enhancement Tax (or MET) was a convoluted scheme developed in 1991 to borrow from the hospitals and leverage money from the federal government at no cost to the hospitals. In the first decades it wasn’t a real tax, it had no cost to hospitals, and was something they could hardly refuse to go along with. It took almost 20 years but the folly of trusting a money hungry government finally hit them like a 2×4 to the face.

The no-cost favor hospitals did the government had created a structure to collect hundreds of millions of dollars. In 2009, the government took some money off the top. In 2011, hospitals were hit with a de facto tax increase of $250 million. When your taxes go up that much, you take action.

The hospitals stopped being cooperative doormats, hired good lawyers, and – despite the famous lyrical prediction to the contrary – fought the law and the law lost.

That put the government in an odd spot. If they took no action, about $370 million for the current budget would either not be collected or refunded while only $50 million of spending would go away.

Your perspective on what should happen next might depend on your thoughts about the lawsuit. If you believed the state’s appeal of the decision would be successful, you might not think any action necessary but few believed such a thing. Most people – and this includes me – believe that the tax would remain unconstitutional and there would be a $320 million budget hole.

This put hospitals in the driver’s seat. They were willing to negotiate a settlement that included more money for the state but insisted in exchange on some reversal of the earlier $250 million tax hike. There is no possible settlement that will not create a spending problem of some sort.

Theoretically, the tax was always collected to fund uncompensated care (largely free charity care that hospitals provide low income patients) and for Medicaid underpayment. Remember that Medicaid is not the government paying for health care. It is the government paying about a third to a half of what private insurance pays the same provider for the same service and expecting the provider to eat the rest of the cost. In theory, the MET is to help cover some of those underpayments.

The current proposed plan mandates that a minimum portion of the tax collected to fund uncompensated care actually does so and that those payments are made proportional to charity and Medicaid care actually provided. Even after we made a fake tax a real tax, some money went to such payments but that amount will probably rise by $125 million – half of which would be paid by the federal government.

There is a substantial difference between how much we will collect and how much we will return to hospitals. The remainder must be used – as it is used now voluntarily – to support regular Medicaid provider payments which we have to make either way. That additional amount can be thought of as the portion of the scheme that is a real tax. That amount is likely to be around $80-100 million less in the next budget than it is today. That’s a big hole but it’s after the election so politicians are happy.

The precise language of the law is being tweaked to eliminate drafting errors and some inconsistencies so it is a bit of a moving target. To make matters worse, there is not yet a fiscal note attached to the bill that is publicly available. I remain convinced that no legislation should be passed that does not include a fiscal note – the official financial analysis – that is available to the public for a week before the vote.

All that having been said, something has to be done or the state will have a huge financial hole. If lawmakers are confident the State would win an appeal to the Supreme Court, they might vote against this incomplete agreement. However, I think the state would lose an appeal and so do most lawyers I know. In the battle between a crap shoot and a beat up used car, the jalopy wins.

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Narrow Hospital Networks are the Last Gasp of the Past

Charlie Arlinghaus

May 21, 2014

As originally published in the New Hampshire Union Leader

The real problem with the Obamacare network in New Hampshire is not that it is too narrow but that there is any network at all. Healthcare costs are lowered not when the one government sanctioned picks winners and losers but instead when providers compete for the customer pool. The oddly constructed health exchange in New Hampshire is not the beginning of the future but the last gasp of the past.

Under the Affordable Care Act (ACA) commonly known as ObamaCare, the federal government created a set of regulations to offer approved health insurance in what was optimistically called an exchange. In theory — and in some larger states this sort of worked – multiple insurance companies would offer competing products albeit ones that were all constructed according to the thousands of pages of regulations that limit differences.

In New Hampshire – and this wasn’t actually a surprise to anyone – it didn’t work that way. We don’t have a lot of competition in the regular health insurance market and only one company, Anthem, signed up to be the government insurer. This is where the trouble starts.

Insurance companies worried that the population would be somewhat sicker than typical and have fewer young people than they’d like (young people consume very little healthcare so their premiums are profit used to subsidize others). In fact, we’re discovering the population is much sicker and less young than previously thought.

To control costs, Anthem did what so many exchange insurers have done across the country: they developed a narrow network of hospitals and affiliated doctors. Some hospitals were in and others out. At first, half the hospitals were in and half out but they added back in a few small rural hospitals under pressure. Right now there are 16 winners among hospitals and 10 losers. Naturally the ten that have left out of the government-subsidized health insurance system are worried.

The use of preferred providers and networks of allowed providers was common in the 1990s era of HMOs and is making a comeback. The Kaiser Family Foundation reported that narrow networks in employer plans rose from 15% to 23% in the last six years. On ACA exchanges across the country narrow networks account for 70% of the plans.

The reason is cost. Exchange plans are not like regular private insurance. They need hospitals and the doctors they own to accept a significantly lower payment that your insurance and mine give them. The deal offered is that you’ll get less money but we’ll improve your market share by excluding some of your competition.

In April, the Congressional Budget Office found that costs will likely be $1.38 trillion rather than $1.48 trillion over ten years or about 7% lower than they would have been. The CBO said exchange plans have narrower hospital networks, lower payment rates, and tighter management of use of care (think HMOs) than regular insurance does.

In a regular free market, there is nothing wrong with one company deciding to offer a product that can’t be used everywhere. Narrow networks are fine. If it’s too narrow, try another product. But the exchange isn’t regular. One provider of a government plan that many citizens are required by law to purchase insurance from is not the same thing as regular choice. As the government pushes more and more of the traffic into the exchange, hospitals are rightly worried that if they’re left out that the government as de facto selected them for closure.

So we end up with hearings about whether the state should have, once it knew there was to a monopoly provider of the service, approved picking winners and losers this way.

It doesn’t have to be this way. There is an argument to be made for not having networks at all. Noted national policy expert John Goodman writes about Wellpoint in California. They noticed that knee replacement cost from $15,000 to $115,000 for the same thing. They offered a plan for state workers and retirees that paid $30,000 which any one of 46 hospitals would accept. Consumers could go anywhere else but any cost over $30,000 was on their own. The result: Prices came down everywhere to meet demand. Anyone who wished could provide the same service at the same cost.

I think that model of pricing is worth repeating: Any provider who chose to meet the cost was eligible to provide the service. This model doesn’t pick winners and losers. It creates an incentive and offers complete customer choice. Customers could pay more but providers competed and often lowered their price to get the business.

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