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Governor’ Raimondo’s $13.6 Million Refinance

Give this to our super smaht, financially savvy new governor: She knows how to pack a budget with things that require detailed review and analysis if the public is going to have any real sense of whether it’s a good or bad package, on the whole.

Jennifer Bogdan does the good work of digging into the big refinance part of Governor Raimondo’s proposal in today’s Providence Journal:

Roughly $64.5 million in Raimondo’s 2016 fiscal year budget would come from a refinancing effort. Another $20 million would flow in fiscal year 2017. The bonds in question have an average interest rate of 4.9 percent, but if refinanced the interest rate is expected to be lower than 2.34 percent. She calls the refinancing conservative and says it would be irresponsible not to consider a money-saving measure for the state.

By “money-saving,” what the governor means is that she’s using the restructuring to borrow around $84 million in the first two years.  In the third year, the state will actually have to pay about $10 million more in debt service, and the years will change between costing more and costing less over the refinancing period.  As shown in a table included with Bogdan’s article, when the state reaches the end, in 2032, it will have actually paid $13.6 million more in debt service.

That’s where the governor deploys an accounting trick to make the analysis a bit murkier.  In the words of Budget Officer Thomas Mullaney, “The key here is that we would not enter into this transaction if the state would not ultimately come out ahead.”

He’s referring to the fact that if you look at the present value of the changes in payments up and down over the sixteen years — in other words, adjust them for inflation to what they would be in today’s dollars — the real value of the changes is actually $225,238 less in debt service.

Like so many of the “bold and innovative” moves in the governor’s budget, that’s misleading.  For one thing, the assumed inflation rate is critical.  A rough spreadsheet suggests it’s 2.86%.  In that case, it would erase these so-called savings if inflation turns out to be 2.91%.  If inflation averages 3%, then we’ll be well into negative territory.

For another thing, the state isn’t going to treat the refinance like a restricted fund.  The state will spend the savings in the years that there are savings and will have to come up with the money in years that there are costs.  The money is going to have to come from somewhere to pay the extra debt service, and that somewhere will very probably have been worth more to the economy than simply inflation.  (Hey, maybe the governor should invest the savings along with the state pension fund, which the state assumes makes 7.5% profit every year.)

Simply refinancing from 4.9% to 2.34% interest for the same number of years would have saved a great deal of money that could have been left in the hands of Rhode Islanders.  Whatever the governor’s room full of smaht people do for economic development, they have to do better not only than the cost of the refinance, but also the economic activity of people acting without the government’s meddling.

Governor’s Office: Apartment Tax Not Intended

Ever since Governor Gina Raimondo announced a proposal to impose a statewide property tax on residential properties over $1 million, if their owners do not live in them for a majority of the year, debate has raged as to what would be included.  Much of the discussion has been behind the scenes, among people who follow Rhode Island policy closely and representatives of groups that might be affected.

Initially, anonymous blogger CoffeeBlackRI suggested that the tax would apply to rental apartment properties worth more than the threshold.  I replied with an interpretation of the law suggesting that it would not.

The director of Office of Revenue Analysis, Paul Dion, told Katherine Gregg of the Providence Journal that his estimate of revenue that would be produced by the tax included “two-to-five-family residences,” along with other properties.  Some observers took that as conclusive evidence that the tax would apply to small apartment complexes.

A budget summary from Ted Nesi, posted today on WPRI’s Web site, seemed to confirm the interpretation.  Nesi quoted from a report by the House Fiscal office, “It appears that the intent of the legislation and the revenue estimate excludes apartment buildings from the tax; however, as written, the tax would apply to these properties.”

In a statement to the Ocean State Current, Raimondo spokeswoman Marie Aberger echoed House Fiscal’s report, affirming that “the intent is to exclude apartment buildings.”

Specifically, the intent is to apply it to the following categories, if they are worth $1 million or more: non-owner occupied single family residences, two-to-five family residences (only if they are non-owner occupied and not available for long-term tenants), and non-owner occupied estates, seasonal and beach property, residential condos, time shared condos, dockominiums, mobile homes, and vacant residential land.

The “two-to-five family residences” category was included in the estimate from Revenue Analysis because available data does not allow finer differentiation.  For example, wealthy seasonal residents often employ groundskeepers who reside on the property year round.

According to Aberger, the administration’s plan had been to draft more-specific guidance while writing regulations to enact the law, if passed.  “However,” she continued, “we are happy to work during the legislative process to modify the language, if necessary, to ensure that the intent of the legislation is carried out.”

The “Twice on the Pipe” Tax

There appears to be unanimity that I was reading the legal language of the “Taylor Swift Tax” on second homes too closely when I wrote that it should not apply to apartment buildings.  Lawyers for landlord groups, analysts in the executive branch, and analysts in the legislative branch all agree that the net will snag smallish multifamily units, if they’re worth $1 million or more.

If we’re looking for a new nickname for the proposal, I’d suggest the “Tony Orlando Tax.”

But frankly, I’m still suspicious.  As a long-running concern, I think it’s a grave problem that all of us in the policy and law game fall to the legalistic practice of pretending that profound shifts in legal language (like taxing a “privilege” rather than a “property”) are just immaterial “terms of art.”  At the end of the day, the law isn’t what’s written on paper; it’s what lawyers and bureaucrats agree that it means, as a sort of legal clerisy.

Well, these things are “terms of art” until they aren’t… when we discover on some massive, crucial question that (quoting some future judge) “the principle that the ability to have and hold property is a privilege granted by the state is firmly established in the law.”  When that day comes, we’ll learn that the words as written actually did mean something, even though legal experts on both sides of the issue advised us to focus on more immediate traps and loopholes.

As a practical political matter, I have a hard time believing that Governor Raimondo and her staff thought they’d try selling this as a tax on rich vacation-home owners only to turn around once it had been passed and declare, “Ah-ha!  We fooled you landlords!”  At the same time, it’s difficult to believe that they didn’t pick up on the fact that even the guy estimating the revenue for them included such properties.

I suggest the new nickname of the “Tony Orlando Tax” not just because his most famous song was about a guy in an apartment, and not just because the video was filmed in front of a mansion-looking building, but because I think there’s political significance to the lyric:  “knock three times on the ceiling, if you want tax; twice on the pipe, if the answer is ‘no.'”

In order to sneak in the leading edge of a statewide tax on property — on the very privilege of owning property in the first place — the governor knocks on the ceiling asking to tax vacation property, vacant land, and year-round properties.  Then the landlords bang on the pipe to signal, “no, just the other two” and the mistake of including the most organized target for the tax is fixed.  Everybody’s happy, right?

The state’s Director of Revenue Analysis, Paul Dion, tells me that 111 of the 2,359 properties over $1 million that he included in his estimate are “two-to-five family residences,” accounting for 4.7% of the total take.*  That’s about $550,000 total — an easy concession to make in the course of negotiating a budget through the legislature.

* Note: An earlier version of this post characterized the 111 properties as “multifamily rentals,” which was how I asked the question. I should have used “two-to-five family residences,” which is how he responded.

More on Raimondo’s Outrageous Health Insurance Tax

Kathy Gregg has more details on Democrat Governor Gina Raimondo’s proposed tax on health insurance in Rhode Island in today’s Providence Journal, and it looks increasingly outrageous.  First is a little budgeting trick.  The tax kicks in midway through the fiscal year, so on an annual basis, it’s actually twice the cost that the budget advertises:

Targeted to take effect in January 2016, the premium surcharge that Raimondo proposes would raise an initial $6.2 million of the $30.9 million the Raimondo administration is proposing to spend during the year that begins on July 1 to operate the state’s “health-insurance marketplace’’ over the next year.

Over the first full 12 months, HealthSource RI administrators anticipate the surcharge will raise $11.8 million.

And the rate is outrageous, too — above what the federal exchange would charge, for most users:

It would be assessed on the premiums of all health plans purchased in Rhode Island by individuals (at a rate of 3.8 percent) and small employers (1 percent).

As Gregg reports, that will be over $400 per year for some members.  The rate is also higher than the similar taxes in Massachusetts (2.5-3.0%) and Connecticut (1.35%).

One thing that is misleading, I believe, is spokeswoman Maria Tocco’s explanation that, per federal law, “a premium assessment has to be levied this way, as premiums must be the same inside and outside the Exchange for the same products.”  As I explained yesterday, the governor’s proposed language imposes the rates based on market, not plan.  In other words, the governor is taxing all plans whether or not they are offered in the exchange.

I imagine she’s doing that because the rate they’d have to charge in order to follow the method of the federal exchange and still pay for HealthSource would have made Rhode Islanders eyes pop (and further prodded the exodus of productive people from the state).  As healthcare expert Sean Parnell estimated for an article I wrote, last year, applying the federal rate to Rhode Island’s exchange would generate around $5 million.  Roughly speaking, Raimondo’s tax is more than twice as costly, so if it were structured like the federal fee, the rate would have to be up to nearly 8%.

Obviously, more plans and more people means a lower rate.  That’s why Massachusetts and Connecticut can charge less even though their exchanges cost more.  But none of this is news.  The RI Center for Rhode Island has long been saying that Rhode Island’s market is simply too small to justify its own health benefits exchange.

Even agents of the state of Rhode Island admitted this, back when they were free to be honest.  Last June, I quoted from a 2009 report reviewing the lieutenant governor’s proposal for an exchange like HealthSource.  Their conclusion back then?  “Insufficient scale to justify investment. Do not pursue.”

What’s changed that has a supposedly financially savvy governor touting this as economic development?  Perhaps that they think they can get away with it, now.

Beware: The Health Exchange Premium Fee Is a Simple Tax

With publication of the legislation enacting Governor Raimondo’s budget, as House bill 5900, some of the details left ambiguous in standard budget documents can be checked.  One of the more disconcerting is the supposed “fee” assessed on health insurance premiums in the state.

The budget presentation avoids naming what the “fee” is, but the talk and reportage during and after last night’s speech by the governor presented it as a fee structure similar to the way the federal government pays for the federal health benefits exchange.

Reviewing the legislation makes it clear that this is not the case.  The new revenue stream for HealthSource RI is simply a tax.

As I explained during the last legislative session, the federal exchange fee works like so:

  • Health insurers are assessed a 3.5% fee on the premiums of plans sold through the exchange.
  • They are not permitted to charge different prices for the same plan on or off of the exchange.
  • Therefore, the price of the fees must be spread across all people who purchase that particular plan, whether on or off of the exchange.

According to the governor’s legislation, the new health insurance tax would work very differently:

  • HealthSource will determine its budget for the year.
  • That total will be allocated to the small employer market and the individual market in proportion to each market’s participation in the exchange.
  • The insurer will increase all premiums in each market by the percentage necessary to generate the necessary money.

One consequence of this different method that must appeal to our progressive governor is that it shifts the tax burden toward Rhode Islanders with more-expensive plans.  No matter what the proportion of bronze, silver, gold, or whatever plans on the exchange, the tax is a flat percentage on all plans, so people buying more-expensive plans will pay more.

A consequence that surely appeals to the state’s government-first establishment is that there’s no escape from the tax.  It doesn’t matter whether insurers participate in the health benefits exchange or not, and it doesn’t matter if they sell different plans on or off of the exchange.

But the most important consequence is that this fee is completely unrelated to actual usage of the exchange.  Again, it’s just a tax, collected via health insurance plans.

According to the governor’s budget, HealthSource will cost $30.9 million to operate next fiscal year, but $24.7 million of that is still coming from the feds.  You don’t have to agree with me that the Obama administration is breaking the law by continuing to pay for state exchanges to understand that the operating costs of HealthSource are guaranteed to grow by leaps and bounds, as federal involvement tapers off.

In other words, nobody who cares about Rhode Islanders or the local economy should want to cross this particular Rubicon.  Once this new tax is law, all bets are off.  The success or failure of the exchange becomes immaterial.  The General Assembly never has to face the heat for increasing taxes.  The bloated government start-up company that is HealthSource RI becomes just another factor driving up the costs of Rhode Islanders’ insurance.

Possible Budgeting Illusions from Raimondo

Shortly after Governor Gina Raimondo gave her presentation on Rhode Island’s economy and its budget implications, somebody asked me what I expected in her budget.  Here’s a succinct summary of the presentation from the Cranston Herald editorial board:

Neither cuts nor tax increases, the presentation asserts, will solve the problem. The sales tax would need to be raised from its current 7 percent to 8.8 percent in fiscal 2017 to close the projected budget gap. Meanwhile, the $255.6 million shortfall foreseen for that year significantly exceeds the total budgets of 21 combined state agencies.

The governor’s presentation proposes instead a shifting of resources to focus on job growth, creating a “virtuous cycle” in which those investments in education, infrastructure and property tax relief expand employment opportunities and thus grow the state’s revenue base.

My expectation is that Raimondo will follow the playbook from pension reform, with these steps:

  1. Declare a dire problem, consisting of a short-term emergency and long-term doom.
  2. Propose some technocratic solution that will supposedly fix the long-term problem once and for all.
  3. Make sure that there are enough gimmicks in the solution to defuse the short-term emergency and expect attention to have drifted by the time it falls apart.

The short-term emergency, in this case, is a balanced budget for the  next fiscal year, starting this July, and the long-term doom is the unyielding projected deficits resulting, in large part, from Rhode Island’s continuing economic decline.  The expectation, then, is that Raimondo’s budget will include some sort of new revenue stream, perhaps justified by its use toward some economic development scheme, mixed with budget reductions of the “waste and fraud” variety.  Whether the elusive waste-and-fraud savings could be realized is actually immaterial, inasmuch as the budget would be balanced on paper, and adjustments could be made when the budget is reviewed in November and fixed sometime during the fiscal year, when the eyes of those few who pay attention are mainly focused on the next year’s budget.

That’s what I told the person who asked me.  It was notable, therefore, to see this in yesterday’s Providence Journal:

House Speaker Nicholas Mattiello on Tuesday disclosed that Gov. Gina Raimondo had asked him if she could include “$40 million to $50 million’’ in Medicaid cuts, as a “placeholder” in her first budget proposal, without spelling out how and where she intended to reduce spending in the $2.7 billion government subsidized health-care program.

Mattiello said the governor told him, “in very general terms that there would be some kind of a placeholder and a request for a task force to figure out the cuts.’’

Evaluating Tax Incentive Programs: Matching Practice or Kill Order?

When one reads that Rhode Island is engaged in something that might be seen as a “public policy best practice,” cynicism is usually the appropriate response. Such is the case with a Pew Charitable Trusts brief that cites Rhode Island as one of a handful of states implementing good-government reviews of economic development tax incentives.

Ten states and Washington, D.C., according to Pew, have taken steps to ensure “that tax incentives are evaluated regularly and rigorously.”

The legislation in question is a 2013 bill originating in the Rhode Island Senate, number S0734, which evaluates tax incentives and other government activities. The first section of the bill tasks the still-new Office of Management and Budget with “a comprehensive review and inventory of all reports filed by the executive office and agencies of the state with the general assembly.”

So rigorously have Rhode Island’s policymakers been reviewing all of the reports that state government pays itself to create for them that they now require a report on all of the reports that they receive.

Continue reading on Watchdog.org.

Exempting Retirement and Social Security Income

Rhode Island needs to cut all sorts of taxes on everybody.  However, it’s important for policy makers and the general public to ask questions about particular proposals.  What’s the goal of a particular cut; who benefits; where’s the money going to come from?

Conservatives have periodically asked me about the proposal that House Speaker Nicholas Mattiello (D, Cranston) and Senate President Teresa Paiva Weed (D, Newport) are publicly considering — to exempt retirement and Social Security income from taxes.  Although it may be popular to promise senior citizens things, the questions still apply.  Regarding the goal of the policy, Providence Journal reporters Katherine Gregg and Linda Borg offer this summary:

Neither idea is new. But this year, the Democratic leaders of the House and Senate are both talking about how they can keep retirees — and their retirement income — in Rhode Island.

Given limit political ability to cut taxes, does this reform target the group (1) that’s most notably leaving Rhode Island and (2) that Rhode Island needs most to stay?  I wouldn’t say so.  The state has long shed many young, single, college educated residents.  The largest losses by family type have been married families with children.  Once again, our biggest and most important losses are from the “productive class” — people who are interested in using the local economy to change their time and talents into money.  That’s what really grows an economy.

It helps that cause a little to let relatively idle people keep and spend more of their cash, particularly if it keeps them in the state, but it’s indirect and subject to bleeding.  A retiree’s tax-cut-funded vacation in another state helps young working families in Rhode Island not at all.  A retired couple that keeps its Rhode Island house, instead of moving, keeps a younger family from buying that house.

On the question of how the General Assembly would make up for the reduced revenue, it’s encouraging to see Mattiello talking about cuts in spending, but we should believe that when we see it.  The state legislature has a habit of finding ways of shifting burdens around, rather than actually limiting the size of government.

During Hard Times, Crack Down on Workers?

Here’s a pretty good example of how Rhode Island politicians and the special interests who govern them look at their neighbors’ plight.  The legislation is Senate bill 2410, sponsored by Hanna Gallo (D, Cranston, West Warwick), Erin Lynch (D, Cranston, Warwick), and Dominick Ruggerio (D, North Providence, Providence), and House bill 7391, sponsored by John Edwards (D, Portsmouth, Tiverton), Donald Lally (D, Narragansett, South Kingstown), Christopher Blazejewski (D, Providence), and Katherine Kazarian (D, East Providence).

Basically, the legislation — which Governor Chafee signed into law (naturally) — triples the fine for a first offense violating the chapter of Rhode Island law dealing with the licensing of plumbers, from a painful $500 to a potentially devastating $1,500.  Second and subsequent offenses more than doubled, from $950 to $2,000.  There may be a variety of violations that could spark the fines, but mainly, they have to do with performing unlicensed plumbing or disregarding plumbing regulations.

That’s right: After years of Rhode Island’s being thousands shy of its peak employment, after months of its having the worst unemployment rate in the country, during an era of low or non-existent economic growth and taxpayer flight, the Rhode Island General Assembly finds it important to tighten the screws on one of the better-paying blue-collar occupations.

In the upcoming election, voters should consider that the only legislators who don’t think a time of economic agony is ripe for cracking down on people trying to make ends meet were Rep. Michael Chippendale (R, Coventry, Foster, Glocester), Rep. Doreen Costa (R, Exeter, North Kingstown), Rep. Karen MacBeth (D, Cumberland), Rep. Michael Marcello (D, Cranston, Scituate), Rep. Patricia Morgan (R, Coventry, Warwick, West Warwick), and Joseph Trill (R, Warwick).  Not a single senator voted against the bill.

Here are the “yea” votes in the Senate:

YEAS- 33: The Honorable President Paiva Weed and Senators Algiere, Archambault, Bates, Conley, Cool Rumsey, Cote, Crowley, Doyle, Felag, Gallo, Goldin, Goodwin, Hodgson, Jabour, Kettle, Lombardi, Lynch, McCaffrey, Metts, Miller, Nesselbush, O’Neill, Ottiano, Pearson, Picard, Pichardo, Raptakis, Ruggerio, Satchell, Sheehan, Sosnowski, Walaska.

And in the House:

YEAS – 66: The Honorable Speaker Mattiello and Representatives Abney, Ackerman, Ajello, Almeida, Amore, Azzinaro, Bennett, Blazejewski, Canario, Carnevale, Casey, Cimini, Coderre, Corvese, Costantino, Craven, DeSimone, Diaz, Dickinson, Edwards, Fellela, Ferri, Finn, Gallison, Giarrusso, Guthrie, Handy, Hearn, Hull, Johnston, Kazarian, Keable, Kennedy, Lally, Lima, Lombardi, Malik, Marshall, Martin, McLaughlin, McNamara, Melo, Messier, Morin, Newberry, Nunes, O’Brien, O’Grady, O’Neill, Palangio, Palumbo, Phillips, Ruggiero, San Bento, Serpa, Shekarchi, Silva, Slater, Tanzi, Tomasso, Ucci, Valencia, Walsh, Williams, Winfield.

SCOTUS Implication: RI Can’t Force Child Care Providers to Join or Pay Union

The Supreme Court’s ruling in Harris v. Quinn, today, should reverse efforts in Rhode Island to force independent child care providers whose clients receive state subsidies to join a union or to pay “free rider” fees for a union’s negotiating services.

By way of review, last year, the General Assembly passed, and Governor Chafee signed, legislation to allow independent child care providers who have clients receiving subsidies through the state’s Child Care Assistance Program (CCAP) to join a labor union.  The legislation also required providers who didn’t want to join the union to pay a “service charge” for “negotiation and administration of the written contract” that could amount to as much as full dues.  It’s a gray area, but presumably, the state can’t pay parents different subsidies depending on whether or not their providers are in the union.

(In the House, the first five sponsors of the bill were Slater, Diaz, Almeida, Blazejewski, and Handy; in the Senate, they were Goodwin, Jabour, Pichardo, Crowley, and Ruggerio.)

The RI Center for Freedom & Prosperity became deeply involved in pushing back against the suspiciously tilted elections that unionized the providers under the SEIU.  The Current-Anchor  also paid the election some attention, including incidents of state police threatening to arrest private citizens who wanted to observe the proceedings.

According to the governor’s office, negotiations with the SEIU are currently underway, but members of the public (who will be paying the bill) will have no window into them until the deal is done.

The Harris ruling, written by Justice Samuel Alito, pertains to personal assistants for disabled recipients of state aid in Illinois, often their parents or other relatives.  However, the reasoning is the same — mainly that the providers are not full state employees, that their immediate clients are not the state, but the families that they serve, and that the negotiable aspects of their relationship with the state are severely limited.

It is therefore almost certain that a lawsuit by any child care providers who do not want to pay the SEIU “service charges” out of their pay checks will prevail.  It’s always been questionable whether the union could do much for the providers, other than to siphon away money intended to help families pay for child care, but now providers will likely receive any benefits without paying any costs.

For that reason, the Center is calling on the executive branch, in Rhode Island, to halt the proceedings and the legislature to repeal the law.  As the press release states, the Center is also considering the possibility of requesting a stay on any action that would commit taxpayers to unconstitutional costs.